Communicating about the need for higher inflation is also complicated by many Americans viewing it as a bad thing. That’s what Fed officials heard during a nationwide listening tour last year as part of their strategy review: higher prices hurt low-income families unless matched by increased wages.
Work in Progress
In terms of tweaks to strategy, Fed Vice Chairman Richard Clarida said on Aug. 31 there are three things that need further work: How they talk about changes to their policy rate in the future, or forward guidance; how they talk about their balance sheet and bond buying; and how they refine their quarterly forecasts, a task he said would likely be done by the end of the year.
Minutes from the July meeting showed officials discussed tying their interest-rate guidance in the FOMC statement to reaching their goals for inflation, unemployment, or both, and possibly rephrasing their justification of asset purchases in terms of stimulating the economy rather than “to sustain smooth market functioning.” That’s the current explanation, and a change would probably extend the expected time frame for purchases.
But curiously, there seems to be no hurry. John Williams, the New York Fed president, said the central bank needs a reliable forecast before it changes its rate outlook.
Forward Guidance
A Bloomberg survey of economists conducted Sept. 4-10 showed most respondents expect the Fed to clarify its guidance in coming months by signaling that future rate hikes will be linked to reaching 2% inflation on average. But just 35% said they expected such new guidance would be unveiled this week.
Economists put a lot of weight on beliefs, or “credible commitments” by the central bank. Because this is a new commitment, it is going to be hard to just move those expectations with words alone, said William English, a former director of the Fed’s Division of Monetary Affairs.
“In terms of making this change credible and built into expectations of markets and the public, it’s going to take time,” said English, who is now a professor at the Yale School of Management. “It may take a couple business cycles before they have really credibly shown this is what they’re going to do. That’s going to be a project.”