Columbia’s University Lecture was held on Monday at 6 pm in Low. Michael Woodford, John Bates Clark Professor of Political Economy, gave a lecture entitled “Fedspeak: Does It Matter How Central Bankers Explain Themselves?” Syntax and grammar enthusiast Alexandra Svokos heard the answer.
Much as Michael Woodford cares about how bankers explain themselves, he cares about how he explains himself. From an essayist’s perspective, this was a lovely structured lecture, with clear and rational movement from section to section for highest effectiveness. First, Woodford explained “Fedspeak”–a favorite of Greenspan–vague statements given by the Fed. Recently, however, the Fed has opted instead to actually explain their decisions and have higher transparency.
Under Bernanke, the Fed has given frequent press releases and conferences and meeting minutes have been made public. Notably, according to Woodford, the Fed has explained future policies–including the August 2011 announcement that the federal funds rate would be kept around zero until mid-2013. This has since been adjusted to benchmarks rather than specific years: it will remain at that low rate as long as unemployment was above 6.5% and inflation below 2.5%.
Woodford applauded this shift, saying it’s helpful under two of Robert Nozick’s principles: interpersonal and intrapersonal. For interpersonal, Woodford explained that central banks should want people to be able to reply on their decisions. Essentially, it is about generating confidence from the people in the Fed. By explaining future policies, people do not have to speculate and can thus have faith in future actions. Discussing policies in general calms people. This holds especially true during unusual times when unprecedented actions are taken–like during this crisis.
In terms of the intrapersonal, planning and announcing future policies cleans up their organization and work. The Fed can avoid the pitfalls of taking a sequential approach in decision making–where the future effects of present actions are often forgotten–and can instead plan based on the overall picture. Additionally, talking in advance changes public expectations and keeps the Fed loyal to their word.
The Fed can’t lower in interest rate anymore. To stimulate spending now, there needs to be expectations of higher income in the future. By providing forecasts, the Fed can try to make this happen. The 2011 announcement wasn’t a promise but a forecast of future conditions. Individual committee members also now provide their own forecasts. This move to forecasts is clever–their less risky as they are more speculative and can change public expectation.
Despite the positive aspects of this new openness and switch from date-based to criteria-based future decision making, Woodford sees room for improvement. While it’s great that they’re announcing future decisions, the Fed should be clearer about how those future decisions will be made. It is not helpful that they gave themselves two criteria in raising the federal funds rate (unemployment and inflation)–they should only be using one to allow for less ambiguity. Ultimately, though, the Fed is stepping in the right direction and will continue to do so.