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Monetary Policy Strategy Statements Should Have a Strategy

Summary:
At its meeting this week the Fed decided not to post changes in its “Longer-Run Goals and Monetary Policy Strategy” as might have been expected as part of its annual organizational meeting actions as it did last year at this time. The January 2016 statement is still on the Fed’s web page.  Maybe they will make changes at the next meeting, and, in particular, add some words about the Fed’s strategy for the policy instruments.  Despite the use of the phrase “Monetary Policy Strategy” in the title, a strategy for the policy instruments does not now appear in the statement. If you read the statement you will find nice clear sentences about goals, but little in the way of a strategy for the policy instruments to achieve the goals. As former Fed Staff member Andy Levin explains in a chapter in a recent book “the FOMC’s Statement on Longer Run Goals and Policy Strategy is almost exclusively aimed at clarifying its longer-run goals…what’s still missing—and what’s desired by the general public as well as academic economists, market investors, and members of Congress—is for the FOMC to explain its policy strategy more clearly.

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At its meeting this week the Fed decided not to post changes in its “Longer-Run Goals and Monetary Policy Strategy” as might have been expected as part of its annual organizational meeting actions as it did last year at this time. The January 2016 statement is still on the Fed’s web page.  Maybe they will make changes at the next meeting, and, in particular, add some words about the Fed’s strategy for the policy instruments.  Despite the use of the phrase “Monetary Policy Strategy” in the title, a strategy for the policy instruments does not now appear in the statement. If you read the statement you will find nice clear sentences about goals, but little in the way of a strategy for the policy instruments to achieve the goals. As former Fed Staff member Andy Levin explains in a chapter in a recent book “the FOMC’s Statement on Longer Run Goals and Policy Strategy is almost exclusively aimed at clarifying its longer-run goals…what’s still missing—and what’s desired by the general public as well as academic economists, market investors, and members of Congress—is for the FOMC to explain its policy strategy more clearly.”

In a Wall Street Journal op-ed this week former Fed Governor Kevin Warsh made the very sensible suggestion that the Fed “announce a practicable long-term strategy” and add it to the “document—purporting to state the Fed’s strategy…”  In a paper published in the Swedish Riksbank Economic Review I also urged that consideration be given to including the strategy to achieve the existing goals, giving details about the strategy for the policy instruments.  In a blog post on Janet Yellen’s West Coast speeches I suggested a possible way forward.

The Fed is not the only central bank that could be clearer about its strategy. The European Central Bank also has a statement about monetary policy, which it simply calls “Strategy”. It has a good explanation about goals including a “quantitative definition of price stability”, but it too says little about a strategy for the instruments of policy other than reference to its “two-pillar approach” which provides for some cross-checking with the monetary aggregates. The time is ripe for change at a number of central banks. As ECB President Mario Draghi said in a speech last summer in Portugal: “…we would all clearly benefit from enhanced understanding among central banks on the relative paths of monetary policy. That comes down, above all, to improving communication over our reaction functions and policy frameworks.” If there is a first mover problem, the Fed would be a natural first mover.

John Taylor
John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University. He formerly served as the Director of the Stanford Institute for Economic Policy Research where he is currently a Senior Fellow. He is also the George P. Shultz Senior Fellow in Economics at the Hoover Institution.

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