Friday, December 14, 2012

Williamson: How should the Fed work?

A top monetary economist, Stephen Williamson, blogs at New Monetarist Economics (50th in monetary by this ranking).  I check in with Williamson's blog, which is easy to do, because he is not that prolific of a poster.  He spends a lot of time on the blog criticizing, but I understand very little about what he would consider optimal policy.

In the comments of this recent post, he is starting to spell it out:

1. I would not have set any numerical thresholds at all. I didn't like specifying the calendar dates either. I thought that was bad policy if it was a commitment, and bad policy if it wasn't a commitment. 
2. Generally, I think there's no substitute for taking a particular action at a point in time, and then carefully articulating why you are doing it. No need to map out the future. Once everyone understands how the state of the world maps into policy actions, we've reached bliss. No point in trying to describe how you map the state of the world into actions, as that will only confuse people, as we see here. 
3. "At least now we have some idea of what they want to do..." No we don't. All we know is that they will raise the policy rate, if every, at some date after we cross the 6.5% threshold. When does QE end? When will the policy rate rise? Who knows?

I still find the position strange.  He wants lots of transparency for the Fed's decision right now, but no information about the Fed's expectation for policy in the future.

He really doesn't like forward guidance:
The Fed says it is trying to get more leverage from its policy by being more explicit. But in its struggle to do that, it is not increasing the information content at all; if anything it is telling us less.
 I find it really hard to make sense of how providing more information can really be providing less information.  If the new information was worthless, market participants can just ignore it and it does not harm.
On forecasting inflation, the monetary circumstances are so unusual now that there is a huge amount of risk in anyone's inflation forecast, including what you can infer from market prices. So risk is a problem, and its also a problem that the Fed gets to choose the inflation forecast that determines its policy actions.
It's a fair point that forecasting inflation is hard.  I think forecasting future stock prices is much, much harder, but I still think current stock prices have lots of valuable information about the future prospects of firms and the economy.

I wish he'd flesh out his views more on his blog.  I'd like to understand his position better, as it seems very far from my ideal position. 

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