Janet Yellen, vice chair of the Board of Governors for the Federal Reserve System, told a roomful of journalists that the Fed’s accommodative policies have succeeded and communication about long-term Fed strategies is vital to the effectiveness of quantitative easing.
The Federal Reserve used to be somewhat reserved or isolated in terms of its outreach to the public, but that has noticeably changed in the past decade or so and for the better, suggested Yellen.
But if there’s one challenge that needs to be met, it’s the way writers and editors and the general public interpret the Federal Reserve’s monetary policy actions, she explained.
Yellen described to a roomful of editors and writers the need for the public to interpret the Fed actions as forward-looking and not as focused on the near term. Using her analogy, the FOMC has to construct a road for future use even if drivers years from now are not aware of what was happening during the time of actual construction.
“The reevaluation starts with a question that puzzled many of my students when I was a professor: How is it that the Federal Reserve manages to move a vast economy just by raising or lowering the interest rate on overnight loans by 1/4 of a percentage point?” she asked. “The question arises because significant spending decisions–expanding a business, buying a house, or choosing how much to spend on consumer goods over the year–depend on expectations of income, employment, and other economic conditions over the longer term, as well as longer-term interest rates.”
With this in mind, Yellen said it’s not important what happens to the federal funds rate in the near future, but “the public’s expectation of how the FOMC will use the federal funds rate to influence economic conditions over the next few years.”
As for quantitative easing, or the large-scale monthly purchases of Treasury securities and mortgage-backed securities, Yellen believes the purchases succeeded in their intended goal of lowering asset prices to stimulate the economy.
“It is important to emphasize that the effects of asset purchases also depend on expectations,” Yellen said. “If the FOMC buys, say, $10 billion in longer-term securities today but is expected to sell them tomorrow or very shortly, there will be little effect on the economy. Current research suggests that the effects of asset purchases today depend on expectations of the total value of securities the FOMC intends to buy and on expectations of how long the FOMC intends to hold those securities.”
Therefore, the asset purchases are most effective if the intention of the action is clearly explained to the public so they understand the path of Fed securities holdings years in advance, Yellen explained.
While Yellen sees a need for more, and perhaps clearer, communication, she bid adieu to the days of the Fed remaining behind the scenes.
“Better times and a transition away from unconventional policies may make monetary policy less reliant on communication,” she said. “But I hope and trust that the days of ‘never explain, never excuse’ are gone for good, and that the Federal Reserve continues to reap the benefits of clearly explaining its actions to the public. I believe further improvements in the FOMC’s communication are possible, and I expect they will continue.”
