My central complaint with Federal Reserve Chairman Ben Bernanke is his penchant for what is often described as running the Fed like a university economics department. Internally, I do not see this as a challenge, and for the Fed’s culture may be an effective management style. Externally, I see this a potential communications disaster always in the making. The recent uptick in inflation heightens my unease at this approach, and I think Ryan Avent hits the nail squarely on the head:
…An increase in inflation is only worrying to the extent that it undermines the Fed’s efforts to satisfy those mandates, and the above clearly doesn’t count. Yet the simple fact of increasing inflation sends writers running to speculate on and, in many cases, demand central bank action.
And central bankers often play along. You have a number of regional Fed presidents warning that they may be ready to end the latest round of asset purchases ahead of schedule. I don’t know whether there’s any communications strategy within the Fed—whether Ben Bernanke is tacitly approving of these comments or upset by them—but it’s fairly certain that the comments themselves represent a tightening of monetary to the extent that they shape actual market expectations (and there does seem to have been some impact).
That’s no way to make policy. It’s a poor means of communication and a poor decision to tighten. And these poor choices are encouraged by writing that misrepresents the extent of current inflation and its consistency with Fed mandates.
It seems to me that the Fed lacks a coherent communication strategy – there is no willingness on the part of the leadership to enforce talking points. As a consequence, there is enormous pointless chatter from Fed officials that might be interesting in some sense, but provide misleading guidance about policy direction. Recent talk about scaling back the size of the large scale asset program, for instance. Almost certainly not going to happen – so why talk about it? Sadly, it appears to be an almost deliberate effort to create uncertainty among market participants at a time when the opposite is so important.
Of the frequent Fed speakers, I think Chicago Fed President Charles Evans and Atlanta Fed President Dennis Lockhart are particularly good. And not because they tend to say things that I agree with, but because they say things that I think reflects the majority view of the monetary policymakers. I suspect incoming San Francisco Fed President John Williams will fall into that same category. The so-called hawks Philadelphia Fed President Charles Plosser and Richmond Fed President Jeffrey Lockhart are interesting, but one needs to discount their tendency toward inflation/balance sheet concerns. And, I hate to say it about a Fed official, but I wouldn’t take much stock in the words of Dallas Federal Reserve President Richard Fisher. He may talk tough, but I believe he would always fall in line with the majority decision of the FOMC.
Hopefully, regular press conferences by Bernanke will foster a more consistent voice among Fed officials, or at least a guidepost by which market participants can more easily identify and dismiss the loose talk of policymakers and the fringes of policy.