The FOMC’s Extended Period

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“The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions . . . are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
                                                                           – FOMC Press Release
                                                                                27 January 2010
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“I support your recommendation. I would have preferred to eliminate the ‘considerable period’ phrase, get it over with, and start the New Year out with a clean slate . . . .”
                                                                           – FOMC Member
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At the latest FOMC meeting, on 27 January 2010, the Committee once again retained the “extended period” phrase to reassure everyone that it wasn’t close to permitting the target federal funds rate to rise. One FOMC member, Tom Hoenig, President of the Federal Reserve Bank of Kansas City, dissented because he “believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”

The second quote above, however, was not from President Hoenig. It was from me, made at the conclusion of the FOMC meeting on 9 December 2003. What is it they say? The more things change, the more they remain the same. Chairman Greenspan’s “considerable period” is now Chairman Bernanke’s “extended period.” Both outlived their usefulness. Indeed, I had argued against repeating the same language meeting after meeting because it robbed the Committee of the flexibility it might need to respond to changing circumstances.

I agree with my friend Tom Hoenig that the expectation of exceptionally low levels of the federal funds rate for an extended period is no longer needed. The market needs to get used to the idea that rates may rise without approximately six weeks of advance warning when the FOMC finally decides to remove the phrase.

I believe the Bernanke Fed did a great job dealing with the financial crisis, with one exception. It was a little late to the party. I thought the FOMC should have begun easing policy at its meeting on 7 August 2007, or, at least, remove the tightening bias it went into that meeting with in preparation for a near-term easing. It did neither. It retained the 5 ¼ federal funds target and its bias language suggest that inflation was still the predominate danger. Its first easing move of the crisis was a change in the discount rate. They didn’t reduce the target federal funds rate until the 18 September 2007 meeting. I don’t know what role, if any, the bias language may have played in that delay. Anyway, once the FOMC got on the case, it was effective.

I was not only against repetition of the same language meeting after meeting as unnecessarily constraining; I was against having formal bias language at all. The following is an excerpt from my remarks at the 15 September 2003 FOMC meeting:

“As you know from my position over the last couple of years, if we are going to make changes in our communication practices, I would be in favor of letting the policy decisions speak for themselves. Market participants and other observers understand the context and the circumstances we’re in when we make those decisions. So I don’t think a lot of explanation as to why we took a particular action is necessary. We should keep things as simple as possible and have as few moving parts as possible. Ideally, I would like not to have to vote on a bias. Then we would not have to report on it, and it would be one less thing we can get wrong. If that’s a movement away from transparency, I think it can be offset by moving up the release of the minutes to an earlier date.”

We did move the release date of the minutes to three weeks after the meeting in question; before that, they weren’t released until after the subsequent meeting.  That was not done, however, as a quid pro quo for eliminating the bias vote and repetitive language.

Some time during the debates about transparency, I wrote the following verse, which probably didn’t endear me to my colleagues. I didn’t put it on my web site until later.

Transparency is a current central banker cause
But it reminds me too much of sausages and laws
I think translucence, like my shower door, is a good compromise
It lets in the light, but keeps out the flies.