Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

Thank you, Governor Kohn. Brian Doyle, Vincent Reinhart, and I will be speaking this morning on the material labeled “Staff Presentation on Producing and Publishing Economic Forecasts.” As the top panel of your first exhibit notes, the Federal Reserve regularly provides the public with information on the outlook in the Monetary Policy Report, congressional testimony, the FOMC minutes, and the statement. You presumably undertake this effort with an eye toward advancing the goals of economic performance, public discourse, your own internal discourse, and efficient operations. A key issue in your deliberations today is whether changing your practices in this area would advance these goals further or achieve a better tradeoff. As shown in the bottom panel, this morning Brian, Vincent, and I will address three questions related to this issue. I will start with the production and publication options that are open to the Committee. Brian will then discuss what we can learn from the international experience. Finally, Vincent will consider the governance issues that would arise under alternative arrangements.

Many ways of changing your current practices are possible. Exhibit 2 focuses on one fundamental choice that you confront in this regard—namely, how to produce the forecast. As noted in the top panel, you have three main options. First, you could continue to produce independent forecasts, with each of you solely responsible for your own forecast. Second, you could choose to produce a single centralized forecast, working together as the whole Committee or delegating responsibility to a subcommittee. Finally, you could adopt an intermediate position and produce coordinated forecasts, with your individual projections conditioned on common assumptions for factors such as oil prices and fiscal policy.

As highlighted in the bottom panel, your choice among these three options has important implications for, among other things, your communications with the public and the operational cost of forecast-related activities. To see this, consider one important communication task, the telling of the central story of the outlook. As noted in the first row under the independent option, distilling an informative message from multiple forecasts is difficult, even if those forecasts provide a considerable amount of detail about the outlook. In fact, it is an open question as to whether it would always be possible to craft a central narrative that would command the consent of a majority of the Committee, given the diversity of your views. Moving to the right, the distillation task under the coordinated approach might be simplified a bit because your individual forecasts would share some common elements. Nevertheless, telling the central story would remain difficult if, after settling on, say, a common path for oil prices, you still disagreed markedly about its economic implications. In contrast, as the rightmost entry notes, the telling of the central story would be relatively easy under the centralized option because—abstracting from the difficulties of producing such a forecast—the single projection would provide a clear and coherent message.

Your production choice has important implications for another communication task—conveying the diversity of views on the Committee about the outlook. As noted in the second row of the table, the independent option naturally reveals this diversity through your individual forecasts. To a large degree, the same is true under the coordinated option, although conditioning on common assumptions would obscure some of the possible sources of diversity. Finally, the centralized option would not reveal the diversity of your thinking unless the published outlook summary included additional comments about alternative views.

Your production choice also has important implications for the operational costs of both producing and publishing the forecast. Forecast production is a relatively low-cost task under the independent option because you incur no expense in coordinating your forecasting efforts. Still, you could find yourselves devoting more resources to forecasting if you chose to publish your individual projections. Moving to the coordinated option, here preparing the forecast would be more costly because you would need to spend time choosing a common set of assumptions, but you could limit these costs if you settled on a standard process for this task. Finally, producing a centralized forecast would be very costly, especially at first, because of the wide range of economic issues on which you would need to reach consensus. Given the practical difficulties of achieving such agreement with a group as large as the FOMC, making this option feasible might require delegating the preparation of the unified projection to a subcommittee.

Finally, there are the operational costs of forecast publication. This task may be burdensome under the independent option, especially if all of you wish to participate actively in the preparation of the text as you now do with the minutes. In fact, given the inherent difficulty of crafting an accurate and informative central message from multiple forecasts, negotiating the language of an outlook summary as a group would likely be even more time-consuming than preparing the minutes if the summary is to be anything more than a bare-bones listing of numbers. Publishing the forecast under the coordinated option also may be burdensome, for the same reasons. However, choosing the centralized option could make forecast publication less costly, partly because you would already have reached agreement on the economic factors influencing the outlook. You could reduce costs further if you delegated responsibility for both producing and summarizing the forecast to a subcommittee.

The top panel of your next exhibit considers some of your many publication choices. If you choose to continue producing individual forecasts, you could release more information about those projections—for example, by publishing the forecasts themselves. Such a step would reveal more about the diversity of your thinking, although it might risk diverting attention from any consensus about the outlook. Another option available under all three production choices would be to provide more forecast details, either numerically or in qualitative form. Such a step would facilitate telling a more informative story about the outlook, although it would also create additional dimensions for disagreement. A third possibility would be to lengthen the forecast period. This step could reveal more fully how you expect any economic shocks and imbalances to play out and thus might enhance public understanding of the basis for your policy actions; it could also provide more information about your policy objectives and expectations for the long run. A fourth possibility would be to publish information about the outlook more frequently than you now do. Such a change might help to clarify how you see the forecast and monetary policy responding to incoming data, but it would also increase operational costs proportionately. Finally, you have the option of publishing fan charts and confidence intervals for your projections. This information could help to emphasize the inherent uncertainty of the outlook and the conditionality of monetary policy. Before you could take this step, however, you would have to settle some issues involving the empirical basis of this material.

The bottom panel of the exhibit addresses two options that you have for setting the projected federal funds rate. The first option is to condition the outlook on what you see as “appropriate” monetary policy. If you produce independent forecasts, each of you would continue to make this determination on your own, but under the centralized approach and perhaps the coordinated one, you would need to do this as a group. As noted in the first bullet point, publishing details on what you see as the appropriate path of the fed funds rate could facilitate telling a more informative story about the role played by monetary policy in the outlook. Describing your policy assumptions qualitatively might achieve this objective; alternatively, you could release, say, the central tendency of your specific fed funds rate projections. One possible drawback to publishing an “appropriate” policy path is that the public might misinterpret it as a promise, especially at first; for this reason, you might wish to pair any published fed funds rate path with information on forecast uncertainty. Releasing information on the fed funds rate might also generate public criticism and political pressures.

A second option for setting monetary policy is to condition the outlook on a flat fed funds rate or on the path consistent with market expectations. This approach might mitigate some of the misinterpretation and political problems associated with the release of an appropriate policy path. However, conditioning the outlook on such a path would alter the nature of the forecast and so create communication challenges. In particular, your forecasts would no longer represent your best guess for the likely evolution of the economy, to the extent that a flat fed funds rate or a market-based path differs from what you, individually or as a group, think will be necessary. For this reason, the forecast summary would require some statement about the desirability of the projected outcome to avoid misunderstanding. You might even find it necessary to provide guidance about how the policy path would have to change to bring about a more “appropriate” outcome—a step that would likely generate its own controversies. I will now turn the floor over to Brian.

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