Get ready for a new era in Fedspeak.
The Federal Reserve announced Thursday that it will be reviewing its “strategies, tools, and communication practices” it uses with regard to its dual mandate of maximum employment and price stability. The review could invite big changes to how the Fed arrives at its policy decisions and how it explains those decisions to the public.
“With labor market conditions close to maximum employment and inflation near our 2 percent objective, now is a good time to take stock of how we formulate, conduct, and communicate monetary policy,” Fed Chairman Jerome Powell said in a statement.
The Fed will embark on a listening tour through its reserve banks, in addition to a research conference hosted by the Federal Reserve Bank of Chicago in June. In 2020, the Fed will wrap up its review and report its findings.
The timing of the review appears to line up with the Fed’s runway on its approach to the level of “neutral” interest rates at which the economy is on a sustainable path. Some Fed speakers think it will be another two to three more 25-basis-point increases before the central bank can end its commitment to a gradual path of rate hikes.
Vincent Reinhart, chief economist for Standish Mellon Asset Management, told Yahoo Finance that the timing of the Fed’s broad review falls in line with the Fed’s timeline on getting the economy to its neutral rate. Reinhart said an easy victim of the change would be the dot plot of each FOMC member’s projected rate paths included in the quarterly summary of economic projections. He argued that once the economy is at neutral, the Fed should not have to promise higher or lower interest rates.
“Don’t promise more than you can deliver,” Reinhart said. “And in that case, in conventional policy, you shouldn’t be able to predict what you can do next.”
The review has wide enough a net to cover more than just the SEPs; the Fed could also revisit the models that it consults in its policymaking and the definition of its inflation target, among other things. The findings will ultimately depend on the feedback that the Fed solicits in its year-long process, which could involve town hall-style public sessions.
Powell has prioritized transparency since becoming Fed Chair.
“We strive to explain our actions in a way that enhances our actions in a way that enhances the public’s understanding of our goals and methods,” Powell said in his swearing-in ceremony. “We will continue to pursue ways to improve transparency both in monetary policy and in regulation.”
Powell has already changed the Fed’s policy on communication by pledging press conferences at each of the Fed’s eight FOMC meetings; currently the Fed only gives the media the opportunity to question the Fed Chair in four meetings each year. He said Wednesday that the press conferences will make each meeting “live” for possible rate increases. Since raising from the zero-bound, the Fed has generally aligned rate hike announcements with FOMC meeting with a press conference.
Morgan Stanley published a note Thursday saying that the 2019 press conferences will give the press plenty of opportunities to ask Powell for updates on the ongoing review of its strategies, tools, and communication.
Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.