The Economist’s Free Exchange posted a fun read on the evolving role the Fed plays in discussions of monetary policy. In the past, the Fed had been pretty cloistered in its speeches to the public at large, and Fed transcripts are still released in 5 year lags.

However, since the onset of the Great Recession, there have been more calls to the Fed to provide clarity in the face of high unemployment and crushingly small inflation. The Chicago Fed called for ‘Forward guidance”. Basically this idea is that the Fed will guarantee their decisions will hold until the economy meets a certain threshold. Now while the threshold that Evans (the Chicago Fed President) wanted has not been agreed to, Chairman Bernanke has been more forthright in his acknowlegement that QE3 with a forward guidance can be effective.

Money quote:

Until 1994, the Fed avoided announcing its decisions until well after the fact. Since then, the central bank has become much more transparent about its intentions, deliberations, and forecasts. Some analysts, like Henry Kaufman, argued that this was a mistake, for similar reasons as Messrs Adrian and Shin. Meanwhile, most central banks stopped paying attention to quantity measures like the monetary and credit aggregates more than two decades ago. There were good reasons why that happened, but new and improved quantitative measures may prove to be more helpful than the price measures (interest rates, credit spreads, etc.) currently favoured.

 

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