|
Is there room for improving the monetary policy framework?
By keeping the federal funds rate exceptionally low, the authorities have successfully geared monetary policy to engineering the pick up in activity. However, the unusual situation of having core inflation at a rate that is slightly below the perceived official comfort zone increases the need for clear communication between the monetary authorities and the public, for two reasons. First, if core inflation continues to slow, the Federal Reserve will have to prevent inflation expectations from falling, since that would raise real interest rates, braking the expansion unnecessarily. Second, in the more likely event that the recovery progresses sufficiently strongly to gradually eliminate spare capacity, the authorities will need to make it clear to investors that some increase in inflation from current levels is acceptable and should not be mistaken for a weakening of their commitment to price stability. In either case, the Federal Reserve should provide clear guidance to markets regarding its own assessment of the economic outlook and policy response conditional on prospective developments.
Responding to this need for effective communication, the Federal Open Market Committee (FOMC) has recently made several changes to the contents of the statements released following its meetings. It has separated the balance of risks assessment for inflation from that for output growth. Moreover, it has added a more forward looking element by its recent indications that monetary policy can remain accommodative for a “considerable period” or be “patient”. While these changes have provided valuable information, further steps toward greater clarity could help to inform markets about the FOMC’s assessment of future economic developments and policy responses. In particular:
-
An earlier release of the FOMC meeting minutes - now published only after the following meeting - should be considered.
-
The FOMC may also want to release its own projections more frequently and for a broader range of variables and a longer horizon than currently.
The Federal Reserve recently set up a group to study some of these questions. More fundamentally, with the explicit approval of the relevant Congressional committees, the FOMC should consider quantifying its working definition of the price stability objective mandated by law, specifying a suitable price measure and a desired long run average value or range.
--------------------
The full edition of the OECD Economic Survey for the United States is available from:
Return to the OECD Economic Survey - United States 2004 homepage
Une Synthèse (en format pdf) peut également être téléchargée. La Synthèse contient les évaluations et recommandations de l'OCDE.
|
