The Fed’s “open mouth operation”

I ran across this wonderful phrase in John Cochrane’s blog and later found the same term used by David Altig in 2004. So it’s an old phrase, but new to me. But what are we talking about?

This is not Japan

Some have suggested the Fed should be more aggressive, even if it leads to higher inflation.  Bernanke has said in the past that Japan made this mistake, failing to respond forcefully to slow growth and deflation in the 1990s.  Our own Kim Schoenholtz addressed the issue today in an interview on CNBC following Bernanke’s press conference following the latest FOMC meeting.  A brief summary (lightly edited):

Maria Bartiromo:  Is the Fed out of bullets?

Kim Schoenholtz:  They’re not out, but they’re cautious about using their most powerful tools — and they should be.  This is not Japan.  There’s still a good chance they will respond aggressively in the coming months.

For the complete interview, see today’s Closing Bell (short video).

Transparency can be trying

A post by Kim Schoenholtz

Last week the Fed released – for only the second time – individual members’ projections of the target federal funds rate.   The median projection for late-2014 is now at 1% — about 25 basis points higher than in the original January projections.  Moreover, only four of 17 FOMC members now expect that the first rate hike will  occur after 2014, down from the previous tally of six.

The Fed as Inflation Targeter

A post by Kim Schoenholtz

Today, the U.S. Federal Open Market Committee (FOMC) announced a major update of its framework for setting monetary policy. While the FOMC emphasizes its “dual mandate” (regarding inflation and employment), the new framework is fully consistent with an inflation-targeting central bank.

Toward an Even More Transparent Fed

Monty Hall, of Let’s Make a Deal fame, aimed for suspense, but he knew that a little transparency could add to the tension of a game show. So he told contestants what prize was behind the winning door, but not which door it was. As they selected among the three doors, anxious contestants provided titillation for TV voyeurs. [Unintentionally, Monty provided a great lesson in probability: See herewhy it’s optimal for a contestant to switch the door selection after Monty (raising the suspense) reveals that an unselected door does not contain the prize.]Monetary policy should not be designed to heighten suspense, nor should it be aimed at voyeurs. Yet, as central bankers around the world now affirm, transparency usually is desirable because it makes policy more effective.