How to Re-Evaluate the FOMC's Longer-Run Goals and Strategies
(Corrected Ms. Wilkins' title - 2/1/16)
After its recent meeting, and as it has after its past four January meetings, the Federal Open Market Committee (FOMC) released a statement of its longer-run goals and strategies. The five statements are highly similar. In particular, they all share the same quantitative formulation of price stability as an inflation target of 2%. And they have the same basic language describing the Committee’s approach to the employment mandate, and to possible tensions between its two mandates. (As I noted in a tweet earlier this week, I was delighted to see a new sentence in this year’s statement emphasizing the Committee’s view that its target is, indeed, a symmetric one.)
There is probably nothing wrong with the 2016 statement being so similar to the 2012 statement. But should we expect the 2022 statement or 2032 statement to be as close to the 2012 statement? I would hope not - we continue to learn about central banking, and the FOMC's statement should reflect those lessons.
In this post, I argue that at regular intervals, the FOMC should be willing to consider the possibility of broad changes to its long-run goals and strategies statement. I argue too that this review process should be much more open to public input.
In making these arguments, I’m heavily influenced by the practices of the Bank of Canada (BoC). The BoC is in the midst of its regular quinquennial process of re-examining the goals of monetary policy in Canada. The process is a very open one, both in terms of what is under consideration and how it is being considered. How open? Well, here’s what Senior Deputy Governor Carolyn Wilkins of the Bank of Canada said in November 2015:
While we’re committed to our inflation-targeting framework, we’re taking a hard look at it ahead of the official renewal in 2016. The questions we are asking are: Should we consider targeting a rate of inflation higher than 2 per cent? Should we continue to use CPIX as our operational guide? How do we incorporate financial stability risks into the conduct of monetary policy?
She didn’t make this statement in a closed meeting to her colleagues, nor in a speech to a group of a hundred leading financial market participants. Rather, it was part of a lengthy guest post on the blog called Worthwhile Canadian Initiative (run by Carleton University economist Nick Rowe).
I think that the FOMC could learn some useful lessons from our neighbors to the North in this regard. To be more specific, I believe that:
Why should the FOMC follow these three steps? There are at least three reasons.
And the third reason? Well, I’ll turn back to Ms. Wilkins for that one:
To get to the right answers to these questions, we need to reach out to people beyond our own four walls. If we don’t, we leave ourselves open to confirmation bias and tunnel vision—and we risk missing out on insights that can ultimately lead to better outcomes for Canadians.
No more to be said.
N. Kocherlakota
Rochester, NY, January 30, 2016
Please address media enquiries and non-academic speaking requests to Monique Patenaude (monique.patenaude@rochester.edu and 585-276-3693).