Charles Plosser makes a very good point:
Date-based guidance sometimes seems like a way for the Fed to achieve a consensus without actually achieving agreement.
That’s actually part of a challenge for the goal of consensus policy-making. To build a consensus you make vague statements that everybody can interpret any way they want to. Is that good communication? No, because everyone on the committee gets to interpret it their own way and then people get confused as to what it really means.
In retrospect, in reflecting upon the way that policy gets made, I think the desire to create big tents in the language actually becomes somewhat counterproductive to effective communication. I don’t have an easy answer. But it’s something that’s worth thinking about.
You go to the Bank of England, you see votes there 5-4, 6-3, all the time, and it’s not a big deal. People disagree but by disagreeing it allows the statement to more accurately reflect the views of the people that voted for it, and so the people that didn’t vote for it can be more articulate about why they disagree, so the differences and the range of views becomes more clear.
A lot of people speculated when the Bank of England started doing this that it was going to cause disruptions. It didn’t. It allowed people to better assess what the future might look like because the differences weren’t papered over.
Basically prioritize precision over consensus.
Yeah.
Some of your colleagues don’t see dissent as a useful gesture. Do you think your dissents have been effective?
I don’t know how effective it has been. I’m trying to accomplish a couple of things. I think it’s very important in the Fed and in other organizations that we openly discuss and debate different points of view. I think this has been extraordinarily important, even more so in challenging times than in normal times. We’ve entered a period where we’re kind of in uncharted territory. We don’t fully understand what happened or what made it happen. Economists are still debating the Great Depression. We’re going to be debating this for a long time, too. So this is a period of uncertainty and so you have good people sitting in that room, smart people, trying to figure it out. And it shouldn’t be surprising at all that all of these smart people have different ways of thinking about this. This is not a conventional episode.
I also think it’s an important thing to convey to the public that all of these different views are being debated within the Fed. It ought to be — I know the markets don’t like it — but ought to be reassuring in terms of public confidence that there’s a healthy debate going on. Always striving for unanimity creates a false sense of certainty that we know more than we actually do.
I also think if I’m going to go out in speeches and communicate ideas and differences of opinion and then not vote, that’s not very credible. That’s saying one thing and doing another. Why would you have a different view in public but not live up to that view inside the meeting when you take a vote? I think I have to match those two things.
One key problem that Plosser doesn’t really address is differences in strategic goals vs. differences in tactics. The easiest way to see that is to assume the Fed switched to something like NGDPLT. In that case with a clear strategic goal there would no longer be hawks and doves, just people with different views on the technical problem of which setting of the monetary instrument(s) is most likely to produce on-target NGDP. But we don’t have that regime, and hence the fight is over both tactics and strategy. Quite simply, Plosser would prefer a lower inflation rate, on average, than Janet Yellen. The people who implement policy should not be engaged in disputes over near term strategic goals, as it leaves the public hopelessly confused about where the Fed is going.
So yes, Plosser is right that disputes should be in the open. Perhaps each member could write down their preferred instrument setting, and the Fed could then set the policy instrument at the median vote. But that won’t solve the problem, at least if they can’t agree on a common strategic goal.
Plosser also had some comments on Switzerland:
In Switzerland’s case they tried to peg their currency as a way to keep it from rising and support the real economy. But Europe is weak. The E.C.B. can’t solve the structural problems that Europe has, and if Europe is going to remain weak, Switzerland also has a problem. And they can’t cover it up with monetary policy. They can’t afford to do it anymore. They can’t solve the fundamental problem of the trade relationship between a small open country in the middle of Europe and the rest of the continent.
Here I have the same problem as with most hawkish pundits, it’s not clear what they are trying to achieve, and how they expect to do so. When inflation is high they say we need price stability, and hence tighter monetary policy. And when prices are falling (as in Switzerland) you’d expect them to say we need price stability, and hence easier monetary policy. But they don’t. Instead they criticize monetary policy for being too expansionary, for papering over real problems, even if that monetary policy was already producing deflation. That makes no sense to me. What do the hawks want Switzerland to do, and how are they supposed to do it?
PS. At Econlog I have a new post on the jobs figures.
HT: Tyler Cowen