Clear communication at the Fed: The impossible dream?

Clear communication at the Fed: The impossible dream?

The Wall Street Journal has a new article on the Fed and how it intends to try to improve its easy money communications policy.

Fat chance.

http://online.wsj.com/article/SB10001424127887323971204578628090326782804.html?mod=WSJ_hpp_LEFTTopStories

Let me try to make this as simple as possible. 

The Fed will never succeed in making its communications clearer or even understandable because its policy is inconsistent and in fact involves basic contradictions. Even if it confronts that, it will not be able to make its policy choice clear..

'Forward guidance' is the first oxymororn in the Fed's arsenal: The Fed has offered us several different kinds of' forward guidance'. It has said that it will keep interest rates low for an extended period of time. It has said it will keep interest rates low essentially at zero until a specific period of time. It then changed that point in the future to which it promised to keep interest rates that low. And, recently it has replaced this policy with something new called 'forward guidance' that offers a profile for the Fed funds rate - a very specific profile. 

Now, here comes the 'Magic'

On one level the Fed calls this 'forward guidance' that is supposed to help us make decisions about the future because it has laid out this futuristic yellow brick road for us to follow.

The contradiction is that even this 'forward guidance' is of a conditional nature and not what it seems. The Fed is not pledging to keep interest rates on this path, it is simply saying that it's the Fed's most likely view but that if the economy turns out to be different than policymakers anticipate POLICY will be different too- but it downplays that potential fork in the road. 

In other words the Fed's 'forward guidance' doesn't seem to be any different than the typical economist forecast which says well on one hand this could happen on on the other hand that could happen. The Fed wants us to focus on 'this' hand and on 'this hand' only.

But beyond that, anyone who has paid any attention to the Fed or to what I've written above, is aware that 'forward guidance' should come with a subscript: the letter "t." This is because the the Fed's 'forward guidance' is only the Fed's 'forward guidance' that exists at a particular period, t.. And as we can see (and have seen, in fact) the Fed already has changed the nature of its forward guidance several times in the past.

So since the Fed's 'forward guidance' that it's offering us now, admittedly is conditional, and since the Fed already has exhibited substantial changes in the way it's characterized its 'forward guidance' in the past, why should we consider 'forward guidance' a tool at all - that is other than a broken tool? And, how can the Fed possibly change its communications to make this oxymoron clearer – that is unless it were to give up on the idea of 'forward guidance' altogether?

When Mario Draghi tried to adopt forward guidance at the European Central Bank a day or so after he expressed his intention to keep interest rates low for an extended period of time using almost exactly the old language that the Fed had used, Jens Weidmann, head of the Bundesbank, said quite specifically that 'forward guidance' would not keep the ECB from raising rates if monetary policy rules and price stability required it.

So what good is it anyway? The ECB exchange cuts right to the quick of it; doesn't it?

There is nobody at the Fed issuing this kind of blunt clarification or countermanding statement to Fed Chairman Bernanke. But it should be quite clear that the Fed is trying to deal from the top of the deck and the bottom of the deck at the same time. And this is why its communication message goes astray.

There may be some academic framework in which 'forward guidance' has some application and in the end can work. I suppose if you and pose the idea that 'forward guidance' exists and has credibility you can move ahead to solve equations based upon its existence. But in the real world the Fed cannot really provide true 'forward guidance'. In the real world 'forward guidance' is necessarily conditional and once 'forward guidance' is conditional it ceases to exist or to be useful or evento be guidance (it might well be misguidance). 

Moreover, once 'forward guidance' has been offered in the past and has changed it undermines the impact and the potential usefulness not to mention the outright lack of veracity in trying to use it EVER again.

Except to this Fed...

I think that the Fed has an intellectual model of 'forward guidance' that is inapplicable to the real world and it doesn't understand that. I think when we recognize the intrinsic pitfalls of the policy of 'forward guidance' outside of an academic framework we begin to understand why the Fed communicates its policy intention so badly.

Problems beyond forward guidance and its flawed yellow brick road

In addition to all that messiness, we have the other wishy-washy aspects of Fed policy that have to do with an unemployment rate threshold that is not a trigger and may not be meaningful whatsoever. And as the Chairman begins to wander off into that weird Wonderland of guidance that once again doesn't exist (telling us what may happen when/if unemployment goes below 6.5%) it's no wonder that people get confused. On one hand the Fed seems so eager to please to provide us with benchmarks but on the other hand it recognizes that it can't provide us with benchmarks unless it's sure that they are going to serve the stated purpose it wants to put them to. At that point the Fed confronts a dilemma.So it has given us meaningless numbers!

Therefore, every time the Fed tries to tell us something that's very specific it winds up having hedge it with caveats and conditional statements that have to be elaborated and clarified at a later date. This is why Fed communication strategy can never be successful. It's just not possible.

This all traces back to Ben Bernanke embracing the dual mandate with a two-pronged objective. Even Yogi Berra knows that when you come to the fork in the road, you should take it. Not Ben. He wants them both.

The Fed has long had this same policy mandate but under Paul Volcker and continuing under Alan Greenspan the Fed had argued that it pursued its goal of maximum sustainable growth best when it achieved price stability.In that it successfully had hammered the two tines of that fork into a single cutting edge. But Bernanke unbundled the strategy to reveal two separate prongs of short run objectives. He brought open conflict back to policy. 

He opened a can of worms, worms that continue to crawl across the table at the FOMC each meeting. These worms are not trained nor controllable and they continue to be the basis for the Federal Reserve trying to give us guidance on policy that simultaneously tugs it in different directions.

To make matters worse the Fed seems to have its own separate judgment or conscience working in the background apart from its stated policy metrics. The Fed seems to be wary of the size of its balance sheet at long last and wants to address that even though its policy metrics do not conform to that desire  

So right now even with the unemployment rate well above the Fed's threshold level of 6.5% (whatever the heck that means) and with inflation under-shooting its long run target (2%) and even decelerating, the Fed Chairman is trying to point everyone to the prospect - in fact, what he deems as the likelihood- of the Fed trimming back on its quantitative easing later in the year.

That seems to be 180 degreees wrong, doesn't it?

To justify this at the last meeting's press conference the Fed Chairman finally told us that the factors that govern quantitative easing are different from those that govern the Fed's ordinary policy, effectively trying to drive a wedge between the fact that the factors governing ordinary policy are calling for the Fed to ease further while the Fed is trying to guide us toward a policy that will see it easing by less using QE. (All this completely ignores the fact that QE was adopted to solve the Zero Bound issue and was viewed at first as an extension of the Fed funds policy. So why QE forces now move it in the opposite direction of the Fed funds rate's governing forces is no small trick)

Only Jim Bullard among FOMC members seems to be bothered by the fact that the Fed's inflation objective is calling for it to do something very different from what it's doing.

As you can see I think the main problem with Fed policy has nothing to do with economics and everything to do it logic. Any logician could look at this and understand the conflicts inherent in what the Fed is trying to do.

The Fed by this time has drunk too much of its own Kool Aide and cannot see how foolish its own policy really has become. 

When I was a youngster I remember learning the meaning of the expression that 'you can't have your cake and eat it too'. I think it's an expression that the Fed needs to confront and come to an understanding about. Because, when it comes to 'forward guidance' the Fed very much wants to have its cake and eat it too. It wants that in many other aspects of policy as well as I hope I have made clear above.  

At least I hope it is clearer than the Fed's communication policy. And I hope it clarifies the problems with the Fed's communications policy.

 

END

Why the Cliff was not our Thelma and Louise Moment

When Thelma and Louise went off that cliff there wasn’t any question what happened to them. There were questions, like “Why?” but not, “What?”

In that sense this is no cliff.

It is a speed bump. If we hit it too fast it will cause damage but it will not kill us or the country.

A speed bump is supposed to slow you down and our fiscal path is wrong and we are far too fast headed for far too much debt. This speed bump was supposed to slow our descent and give us time to map a new path at a safe speed.

It hasn’t worked out that way has it?

Put partisanship aside. The politicians placed this crucial speed bump too close to a flat out trap putting it after THEIR election and leaving little time for its issues to be dealt with and then to be handled in a lame-duck session at that. The bump was placed there for their convenience and now they are incapable of dealing with its demands. 

This is selfishness; it is the only bipartisan act I can detect so far.

Put aside the public opinion polls: Boehner is being vilified because he has an unruly faction to try to corral.  The President, from whom we might have expected some leadership, got the ball rolling by asking for the bump to be smoothed by given him the things HE wanted.

The President’s leadership

Obama claimed a mandate. Let’s look at this. He was elected with a popular vote margin that exceeded the margins of victory in 23 historic presidential elections but fell short of the margins in 26. His electoral vote count was large, but by popular vote he was only re-elected by a modest margin. The voter turnout was a disappointment meaning he did not inspire people to vote. Compared to his first term he has lost his mojo. His only mandate that I can see is to do his job just like the mandate for the Senate and House members.  Since no one party is in power, the situation calls for compromise. That is the only mandate and both sides are resisting it.

Obama’s saying he had a mandate for his views was sham. Calling for capitulation by Republicans was brash and over-stepped the bounds of reality. The President got this ball rolling down the wrong side of the hill. Now it’s way too hard to get it back and to start again.

The Republicans took up the President’s ‘challenge’ and asserted that THEY had a mandate too; a mandate from their constituents not to raise taxes and suddenly there we were right smack dab in the middle of political grid lock.

We are right where the President led us.

So he may get good grades and maybe it is the 47% talking, but who in America realizes that this tangled ball of string is of the President’s doing? Harry Reid’s saying Social Security was off the table did not help either. After the elections Boehner did say that ObamaCare was now the law of the land. Republicans were not obstreperous. Yet the view seemed to be that the Republicans were supposed to roll over like a submissive dog and show their belly to the sharp Democrat teeth and give in.

They have not done that and for that they are vilified?

How did that happen?

Don’t Americans realize that putting a greater burden on the 53% that pay Federal Income Taxes (FIT) is not a solution but only an expedient? Interestingly even in France the mantra of ‘tax the rich’ is running into trouble. French courts have thrown OUT the 75% top rate change that socialist Hollande instituted calling it unfair.  Even France has fairness rules

The Real Solution

The real solution is to get incomes UP so the ranks of the 47% will shrink. If America is not a land of opportunity then it is nothing. Without opportunity there will be no freedom. People have to be able to afford their freedom. Freedom has a decided - if somewhat oblique - economic element. America is not a land of equal outcomes as the President seems to be trying to make it (that by the way is socialism/communism etc: from each according to his ability, to each according to his ‘need’). But it has not been a land of equal opportunity either and that is what must be fixed more than to arrange handouts designated by income cohort.

Inequality of outcome is a great motivator. Equality of opportunity is what makes unequal outcomes ‘fair.’

And there we are.

I do not see these principles being reflected in our political debate. What I see is each party taking America’s flaws and trying to make them the result of the other side’s ideology. There is no sense of looking at our problems and trying to create some short term help while putting the economy on a more sustainable long term path with improved opportunity. There is ideology, gamesmanship, and political posturing to try and make the ‘other side’ seem responsible when things go awry.

Democrats are winning this game largely because the press REALLY IS so liberal. By any objective measure what is most wrong with the economy looking into the future is spending - way too much spending- it will consume a growing share of GDP as we look into the future and evaluate the responsibilities of government under our current array of promises. The tax revenue shortfall is a product of a lingering recession.

Class warfare is not the solution. But Obama and the Democrats have found a discordant note that the press has echoed and Republicans have been unable get a fair hearing although they really occupy the high ground in this debate. They have ‘cleverly’ fumbled the ball by making their pledge of ‘’no tax rate hikes’ the center piece of their debate instead of focusing on excessive government spending and promises.

Obama is making Republicans look bad by offering to shave the cliff by giving them everything HE wants and nothing THEY want AND because the middle class also wants these things. Obama’s power grab makes Republicans look bad. But bargaining is a two-way street not the one way street that the President would make it.

Another way to think about government spending

The more of our GDP that will require tax revenue that is going to be spent on government programs be they military spending, Medicare, Medicaid, ObamaCare, Social Security, or whatever, the less if left over to finance the America that used to be characterized as rugged individualism. That means the less choice and the less freedom we all will have since each family will retain less of its income.

Obama is from Illinois. It is an extremely indebted state. We should guard against him wanting to impose on the nation what has been his own experience in Illinois. Illinois is no role model. Democrats there that have controlled that state have not turned it a model we should emulate. Illinois has the fourth-highest debt in the nation, with liabilities totaling $271 billion. Only California, New York and Texas are carrying more debt.

But this situation is not just about starry-eyed tax hike loving (even if P-R savvy) Democrats. Republicans should realize that the nation has been much more prosperous even with higher tax rates. Democrats need to realize that the tax system and its network of deductions work together. Fairness is an issue here. Even France has overstepped its own liberal socialistic bounds in simply soaking the rich as its courts have rescinded the 75% top marginal rate branding it as unfair. Counties with much higher progressive tax rates than ours are countries that are socialistic and that do not espouse a doctrine of unequal outcomes. This is not and never has been America. America has always been the land of opportunity. The trick is to make opportunity more equal.

If we are transitioning to a more socialistic country we should find a way to get a consensus. This sneak attack of socialism is a bit like what the EMU is doing by changing its provisions bit by bit and never letting the people vote on what the leaders (leaders?) are doing.  If, however, the desire for more transfer payments is a result of our horrific recession and our inability to get the economy on track and is more the result of temporarily reduced tax receipts, we would not want our temporary situation to send the economy permanently down a path it will soon regret.

The real nature of the Cliff debate:

Yet none of this is part of the national discussion. It is all Hatfields Vs McCoys and there is no discussion just a lot of shootin’... mostly each side shootin’ its mouth off: Mouth open! Ears shut! Mind Closed!  Ready! Set! Go!

We can look back and see things that are wrong or at least that have turned out wrong. While thousands were prosecuted in the 1980s after the S&L crisis only two (not two-thousand only TWO PEOPLE!) have been indicted in this financial crisis and they got off scot-free. And this was a much more damaging financial crisis. Let’s remember that Obama runs the Justice Department! He is President! Justice reports to him!  If you like to call ‘bankers’ ‘banksters’ Obama is the guy who has NOT prosecuted them (has not directed the Justice Department to prosecute them). Yet the anti-Wall Street crowd is also anti-Republican and anti-1%. It’s all very curious, isn’t it? 

They used to talk about President Reagan as the Teflon™ president. Obama is at least as lucky.

What’s really wrong (not class warfare)

Both Republican and Democrat administrations have been happy to sit by and watch our international (current account) deficit plunge into larger and larger red numbers. There is nothing remotely like free trade that would let this happen, yet both parties seem to be the in grips of multinational corporations that have used cheap foreign labor and the lack of foreign exchange rules to exploit that cheap labor abroad, keep it cheap, kill jobs and income at home while driving the middle class into poverty and busting unions. (Of course the government’s role in trying to get more people into houses they could not afford using Fannie Mae and Freddie Mac sort of speeded things up.)

Under any reasonable market-determined exchange rate regime the US would not have been able to run such increasing deficits. Academics would tell you that this economic result is not one predicted under a free-float model of exchange rate determination. America did not run persistent and expanding deficits to finance investment but to finance consumption! Under a gold standard the US would have staunched its deficits along ago under the pain of gold transfers from the US to China and to other persistently surplus countries to settle its deficit accounts. That would have proved too painful to endure.

Anyone that does not admit that China’s development has not been at the cost of the US is just not paying attention. Why does the country with more ‘poor’ people than any other place on the face of the earth have over $3trillion in foreign exchange reserves? Couldn’t it find a use for that wealth? Yes it could, but since needs to buy dollars (and to accumulate FX reserves) to keep the dollar strong and the yuan weak so it can continue export to the US and keep its low labor costs and keep US firms investing more in China to exploit those low labor costs, it chooses to accumulate more ‘wealth.’

Over the years as China has developed it has suppressed its consumption, once up to 50% of GDP it has slipped back to 35% of GDP an extremely low level. Instead, of letting standards of living rise, China has restrained them. So China’s workers have worked their fingers to the bone for little gain while the ‘profits’ in this Communist country went to pile-up as FX reserves. Had China allowed more of a middle class to develop its imports would have risen and its wages would have risen and its need to grow by penetrating the US market would have been reduced. 

Instead, China did not let its currency adjust and did not set those forces in motion. And the end result was that it ‘lent’ more money to the US so we could go into debt to buy the things we wanted (from China) but we became uncompetitive and unable to pay our own way. Republican and Democrat administrations engineered this outcome.

So in the US we have developed a view of class warfare of rich against poor because that keeps us from looking at the real problem. It keeps Democrats and Republicans fighting one another. If keeps policy from looking at how the world trading system is siphoning off US wealth and making us all poorer and poorer so that even the rich feel the sting of their losses.

The middle class has been sacrificed to the multinational ambitions of US corporations by BOTH PARTIES! Now, we are out of touch with who we are and what we stand for. We are devolving into class warfare

In place of a national identity and real leadership we have a cartoon show run by a group of fools called Republicans and Idiots called Democrats and each squirts its seltzer bottle at the other one saying it is the problem. And no matter who we elect things get worse because no one is looking at the real issues.

Politicians are too focused on results (unequal outcomes!) and not enough focused on why the process has broken down.

And you thought the fiscal cliff was a big deal? The fiscal cliff is nothing. We are alive and not well and living in the Republican-Democrat view of THE MATRIX. We are the batteries that run their system. We exist for them; they do not serve us. Our model has become totally dysfunctional. No wonder we have turned to class warfare.

Is it too late to change it?

The Economy shows some life

Yes, we know. We have seen this before. But the Conference Board confidence reading for the consumer has jumped higher, an act we already have seen from the U of M Index. The weekly consumer comfort index is in upward gear too.

All this despite continuing lethargy in the manufacturing measures and still range bound jobless claims.

The economy continues to fool us...optimist and pessimist alike.

Now the Fed could only sort itself out...

Jimmy Carter- really

I just flew out to Seattle. In flight I watched the movie 'Miracle' that I have safely stored on my I-pad.

If you have not seen it I highly recommend it. If you have seen it I'd recommend seeing it again.

It is beyond nostalgia.

The movie begins with actual news clips of the time. The nation is challenged. It features a speech by Carter that sets the stage telling us that people expect the next five years to be worse than the previous five.

I was never a Carter fan. But Jimmy was a good man if not a good president. And, he was a better president than he will be credited for as he appointed Paul Volcker when inflation began to climb.

Jimmy did not scape-goat the Fed. He appointed a guy he knew would conduct monetary policy so that jimmy would not get re-elected. But the country needed a Paul Volcker and Jimmy gave it Paul at his own personal cost.

The movie is not about this. But I am reminded of all this when I see it. And it is a great film about hope and surmounting insurmountable odds. Truly a film for our times. And it is real!

Bernarke testimony July 17 2012

 

Re:What??? First question is on LIBOR???

 The economy is doing badly and yet the FIRST question these guys ask
Bernanke is about the Libor scandal?

Are we more interested is lampooning banks or understanding what the
economy needs? What 'we' can do?


Oh I See my mistake....

 since the Chairman said  what's needed is to eliminate the fiscal cliff
Congress does not want to go there.

It wants to make hay over banks and bad bankers. Is that going to help us???

This is as bad as Obama... when first elected going after healthcare reform
instead of growth and job creation.

This is misguided

This is a terrible grandstanding show by our 'leaders'. No wonder the Fed
is seen as the last game in town even when it is not its job.

Disgusting isn't it?

 

Bernanke as expected..NO MAS-Promised

Bernanke remarks....

This what the Fed has said again and again.

it stands ready to do more.

Despite a cut in the GDP outlook the Fed Chairman points to things beyond the reach of monetary policy as risks he cites the risk  of Europe and the fiscal cliff. Does more QE fix either of these???

Today the NAHB index jumped SIX HUGE Points ahead of the Bernanke testimony.Also MFG IP rose sharply in a report issued today. the economy is not ONLY weak it is MIXED. The outlook is CONFUSED and he says uncertain.

Uncertainty CUTS BOTH WAYS!!!

The economic data are mixed and what is wrong QE won't fix. WON'T FIX. WON'T FIX write that 100 times!!! 

Why is the Street so fixated on the Fed? Why are investors globally fixated on central banks doing more when they have already done too much?

We have fiscal problems and policy confidence problems. Central banks overdoing it will only worsen confidence and worsen results in the end.  

RAB

 

 

Bernanke has laid the groundwork for continuing to be wishy-washy

 I see the same old same old in this report.

The market which wanted the promise of more did not get its fix.

Bernanke is not sticking his neck out. he is not promising any more than he did in his last public meeting

I see little new here.

The just got done extending Op Twist.

It is STILL  watching and waiting.