One sentence in Fed vice-chair Janet Yellen's speech caught my eye:
"Indeed, I believe that the Federal Reserve qualifies as one of the most transparent central banks in the world."
That is total bullshit. The Fed is one of the least transparent central banks in the world.
Ironically, in the excellent paragraph immediately following her bullshit sentence, Janet Yellen tells us precisely why it is a bullshit sentence:
"Moreover, clear communications play an integral role in facilitating the effectiveness of monetary policy actions. Expectations play a critical role in the decisions of forward-looking households and businesses about how much to spend, work, hire, and invest, and their decisions are more likely to be consistent with the objectives of the central bank if they are based on a solid understanding of the shocks affecting the economy and the likely monetary policy response. When financial market participants understand how a central bank is likely to react to incoming information, asset prices should adjust in ways that anticipate the central bank's expected policy actions, enhancing the monetary policy transmission mechanism and thereby supporting the central bank's attainment of its objectives. Finally, good communication can help anchor the public's long-term inflation expectations, which can, in turn, greatly improve the scope for monetary policy to counteract departures of resource utilization from its sustainable level."
The Fed is one of the least transparent central banks in the world because it is totally opaque about the only thing that really matters for monetary policy. What is the Fed's objective? What is the Fed's target? What is it trying to do? Where is it trying to go? How can we possibly know how the Fed will respond to shocks to meet its objective if we don't know what that objective is?
Go on the website of any modern central bank in any other advanced country. Or some not so advanced countries. You will find a number, right there on the home page. That number is the central bank's target. It's nearly always an inflation target, but it doesn't have to be. 2% inflation. Or 2.5% inflation. You know exactly what that central bank is trying to do. And, looking back, you will know if it has succeeded, or failed, in doing what it said it was trying to do.
[Update: Gah! I totally forgot about the Bank of Japan, which is at least as bad as the Fed. But that exception surely proves the rule!]
That's what "transparency" means, when it comes to central banking. It doesn't matter if you publish your minutes. If we knew what your objective is, and that you would get there eventually, we wouldn't really need to know the precise details about your internal bickerings about the best route to take to get there.
The Fed publishes its minutes; the Bank of Canada doesn't. The Bank of Canada publishes its target; the Fed doesn't. Because the Bank of Canada publishes its target, it doesn't need to publish its minutes. The target tells us what we need to know; the minutes don't. The Bank of Canada is transparent in the way that matters; the Fed isn't.
This is not (just) some Market Monetarist point. Any New Keynesian macroeconomist would say exactly the same thing. Expectations of what the central bank will be doing in future matter for what happens today. They matter more than what the central bank is actually doing today. Today is just one day. The future is every day after this.
And it is conditional expectations of what the central bank will be doing in future that matter today. Because we cannot predict the future. But the central bank should tell us what it would do differently if the future turns out differently to what we expect. Canadians know that if new data comes in showing inflationary pressures are higher/lower than we had expected, then the Bank of Canada will also set higher/lower interest rates than we had expected. Which means we continue to expect 2% inflation, regardless of what data come in, because we know the Bank of Canada will adjust the steering wheel conditional on that data.
That's how the Bank of Canada targets inflation. By telling us what that target is, so we expect 2% inflation. And as long as we all expect 2% inflation, it is very hard for actual inflation to differ very much from 2%.
Because Fed watchers don't know the Fed's target, they often confuse the Fed's instrument for the Fed's target. Here's an example:
"Should the Federal Reserve abandon its traditional tactic of targeting interest rates in favor of targeting a specific level of nominal gross domestic product?"
That was the opening sentence by CNBC business reporter John Carney in an article on NGDP targeting. He is confusing today's tactic with the strategic objective. It's like confusing the position of the steering wheel with the destination of the bus. "Should the bus driver abandon his traditional tactic of holding the steering wheel in favour of driving to Toronto?" It's gibberish. I don't blame John Carney for this horrible conceptual mistake. I blame the Fed.
Of course you don't expect the bus will ever get to Toronto if you think the driver's objective is to hold the steering wheel in a particular position. You expect the bus will end up in the ditch. Of course you don't expect monetary policy to work if that's how you think of monetary policy.
Robin Harding of the Financial Times (H/T Mark Thoma) says the Fed has set up a working group to improve the Fed's communications strategy, perhaps by specifying a target. I really hope they do. But that's 20 years behind the Reserve Bank of New Zealand and the Bank of Canada.
Maybe, just maybe, Janet Yellen's bullshit sentence was really aspirational. Like when you tell a kid who's covered in mud: "You are such a clean kid", in the hope of shaming the kid into having a wash. Janet Yellen has to say that, even though she knows it's false, because she's the kid's mother. But I'm the rude next door neighbour yelling "bullshit!"
(Come to think of it, didn't someone recently write a whole book on "Bullshit" saying much the same thing?)
Yes, I know this is a mostly Canadian economics blog, and I ought to be writing about the Bank of Canada. Sorry. But there's just nothing as important to say about the Bank of Canada. The only really important thing about the Bank of Canada is right there on its website for any idiot to see. You don't need me to tell you that the Bank of Canada is targeting 2% inflation.