The Fed’sNew Communication Strategy: Is It Stealth Inflation Targeting?

Or Is It Simply Enhanced Transparency?

By Michael Woodford

Michael Woodford is the John Bates Clark Professor of Political Economy at Columbia University. His first academic appointment was at Columbia in 1984, after which he held positions at the University of Chicago and Princeton University before returning to Columbia in 2004. He has been a MacArthur Fellow and a Guggenheim Fellow and is a Fellow of the American Academy of Arts and Sciences, as well as a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research (Cambridge, Mass.), and a Research Fellow of the Centre for Economic Policy Research (London). In 2007, he was awarded the Deutsche Bank Prize in Financial Economics. His primary research interests are in macroeconomic theory and monetary policy. He serves on both the Economic Advisory Panel and the Monetary Policy Panel for the Federal Reserve Bank of New York, and frequently lectures at and consults for other central banks and policy institutions as well. He received his A.B. from the University of Chicago, his J.D. from Yale Law School, and his Ph.D. in economics from the Massachusetts Institute of Technology.

Along with the minutes of the October 30-31, 2007, meeting, the Federal Open Market Committee released a summary of its members’ forecasts of key economic variables, a practice that is to be continued. Does this change in communication policy imply that the Fed is embarking on an undeclared policy of inflation targeting? Recent speeches by members of the FOMC indicate that the objective of releasing the forecasts is to enhance communication of policy concerns relating to its dual mandate of low inflation and low unemployment rather than set a specific target for inflation. This paper discusses the effectiveness of releasing forecasts in communicating the FOMC’s policy to the public and its value as an internal discipline. It also proposes ways to include projections of policy interest rates in the forecasts while retaining flexibility to react to changing circumstances.

This article is based on comments delivered at the 2008 Allied Social Sciences Association session, “Recent and Prospective Developments in Monetary Policy Transparency and Communications: A Global Perspective.” The session was sponsored by the National Association for Business Economics. This article was originally published on www.VoxEu.org.

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