Too Much Transparency

Is the Fed showing us too much?

Source: Economist

That’s what Stanley Fischer thinks. The Fed’s Vice Chair was discussing monetary policy at a conference last week, and talked about the different tools available to policy makers, especially in an era of big balance sheets.

One of these has been forward guidance. Fed members are expected say where they think interest rates will go every time they speak at a Rotary Club or high school graduation. If they don’t make a prediction in the body of the speech, it will usually be the first question asked. And now the Fed publishes a quarterly “dot plot” of all the members’ interest rate projections.

Fed “Dot Plot” December 2014. Source: Federal Reserve

Fischer pushed back against this regime. Too much guidance can shackle policy makers. Ten years ago the Fed repeatedly told the markets that they expected to lift interest rates at “a measured pace,” and they raised them .25% every meeting—just like clockwork. Fed Chair Janet Yellen has noted that the Committee does not look back fondly at that time. Expectations were so strong that the Fed felt unnecessarily constrained. Departing from the expected path—even for one meeting—would have shocked the markets.

We may not go back to the Greenspan era of “creative obfuscation,” where every statement was deliberately ambiguous. But the Fed is a policy body, not a forecasting club. It’s helpful to know how they think, but there’s such a thing as revealing too much.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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