All Together Now: Monetary Policy Making by Committee

The big news out of yesterday’s Bernanke presser was the Krugman-Bernanke-Krugman not-so-close encounter over the Fed’s stand pat stance in face of a still sluggish economy and high unemployment.  Krugman assailed Bernanke for forgetting the lessons he taught as a professor about aggressive central banking, Bernanke maintained that he’s been entirely consistent, and Krugman elevated the fight by painting Bernanke as having been assimilated by a Trekkie-inspired Fed Borg.   Since Fed reporters rarely get to show their pop culture bona fides, these must be fun days for the Fed’s press corps.

Believe it or not, though, the boring stuff at the Fed presser was still pretty interesting.  Before reporters tossed the Krugman bait to Bernanke, they challenged Bernanke on the discrepancies between the Fed’s FOMC statement and the economic projections that followed.   On the one hand, the Fed statement notes that the FOMC decided to hold short-term interest rates near zero, at least through late 2014.  On the other hand, the economic projections released after the statement indicate that a majority of the FOMC expects to raise interest rates by the end of 2014.  As Ryan Avant of the Economist tweeted: “Mr Bernanke, your forecasts are inconsistent with projected policy actions. Which one are you screwing up?”

Chairman Bernanke’s answer was not surprising.  At his presser this afternoon, he urged reporters to remember the difference between the officials who vote on the Fed statement (currently, the five sitting governors and five Federal Reserve bank presidents) and the larger FOMC (which includes the remaining seven bank presidents who do not have a vote on policy this year).  As Bernanke explained, “There’s certainly a range of views around the table … These projections are inputs into a committee process.”  This is a seemingly innocuous comment about collective decision-making. But I think it’s revealing for a number of reasons:

First, I think it’s important to remember that for all the criticism directed at Bernanke, he is to some degree (albeit tough to measure) constrained by the views of the (largely) privately appointed reserve bank presidents.  The influence of the bank presidents in fact is slightly increased in recent years given the two vacancies on the Fed’s Board of Governors. (If filled, those two governors would presumably give Bernanke two more supportive votes.)   And as the economic projections suggest, the FOMC as a whole is more hawkish than the voting members of the committee this year.  Bernanke today justified the Fed’s reluctance to do more for the economy on macroeconomic grounds. But the political scientist in me suspects that Bernanke is reluctant to push the Fed to do more on its employment mandate given the risk of a more vocal dissent from within the FOMC.  That in turn would raise doubts about the Fed’s future policy stance.  All that said, Bernanke also argued that the committee would consider efforts to seek higher inflation so as to more quickly lower unemployment “very reckless.”  In doing so, he clipped the wings of any FOMC doves who might have favored such easing.

Second, the disparity between the economic projections and Fed’s policy guidance raises questions about Bernanke’s priority of making the Fed more transparent.  As the NYT’s Binyamin Appelbaum argued this week, one of Bernanke’s goals is likely to mollify the Fed’s Capitol Hill critics.  But the combination of a more transparent Fed and a monetary policy committee with a byzantine governance structure might in fact prove to be counter-productive.  Rather than shining light on the Fed’s intentions (thus signaling Fed policy more clearly to markets and perhaps disarming the Fed’s political critics), the Fed’s new transparency might instead be increasing uncertainty about the Fed’s policy intentions.  And unfortunately for the Fed and Bernanke’s good intentions, transparency moves are hard to undo, even if they fall flat.  Long after Bernanke has returned to Princeton (or the Enterprise), future Fed chairs will likely still be grappling with the challenge of transparency.

Beam me up, Scotty.

p.s.  In commenting today on his efforts to make the Fed more transparent, Bernanke noted that he had recently taught some classes “at a local university.”  So much for product placement.

[Cross-posted at The Monkey Cage]

Sarah Binder

Sarah Binder is a professor of political science at George Washington University and a senior fellow at the Brookings Institution.