Fed Strives to Improve Transparency this Year

The FOMC minutes for the December meeting suggested the Fed will focus on communication strategy at meetings this year. Members agreed to include their “projections of appropriate monetary policy” into the Summary of Economic Projections (SEP) beginning in January. The SEP will also unveil “participants' current projections of the likely timing of the first increase in the target rate” given their projections of future economic conditions. Moreover, there will be “qualitative information regarding participants' expectations for the Federal Reserve's balance sheet” and introduction of a more formal inflation-targeting framework.

The Fed aims to increase transparency by implementing the above measures. However, some participants worried that the release of information about their individual policy projections might “confuse the public”. For instance, the public could “mistakenly interpret participants' projections of the target federal funds rate as signaling the Committee's intention to follow a specific policy path rather than as indicating members' conditional projections for the federal funds rate given their expectations regarding future economic developments”. Yet, the concern is believed to be manageable by most members.

What was not mentioned in the minutes was when and how the forecast inflation would be communicated to the public. Currently, the Fed publishes the central tendency and range of participants’ projections during the press conference and publishes the distribution of participants’ projections in the minutes which are released weeks after the meeting was held. Note that the central tendency is calculated by eliminating the 3 highest and 3 lowest values, making the outcome inconsistent with the consensus of the committee. Moreover, if the same practice is to be carried out in the future, the risk is that the central tendency may communicate that policy tightening will occur sooner than markets expect.

Besides the communication strategy, policymakers decided to leave the Fed funds rate at 0-0.25% and to keep operation twist in function. Concerning the joint operation of the swap arrangements with the BOC, the BOE, the BOJ, the ECB and the SNB, Jeffrey M. Lacker dissented the move as he opposed the Fed lending in foreign currencies. He also opposed lowering the interest rate on swap arrangements to below the primary credit rate.