Monday, May 01, 2006

Fedspeak



Ever wonder what in the world the Fed is saying? In its most recent press release, the committee that sets monetary policy for the Federal Reserve Board said that “some further policy firming” may be needed. But for most of 2005, the releases said that “policy accommodation can be removed.” According to Greg Ip, a sharp journalist at the Wall Street Journal, this “sounds like they are removing the sofa beds from the Fed’s executive lounge.” What does the Fed mean when it says these things? And what’s behind the recent change?

In his column On Language, William Safire offers up this quote from Ip and goes on to explain the special language that the Open Market Committee of the Federal Reserve Board uses to describe its actions. He also gives the explanation that Ip, whom he calls the master code breaker of financial jargon, offers for why they speak in code.

1. Safire identifies several key words and phrases that the Fed uses frequently--words he calls “Fedspeak.” These include productivity gains and possible increase in resource utilization. Can you explain how these economic concepts relate to inflation, which the Fed is tasked with managing? What would productivity gains imply about expected inflation, and why? How would an increase in resource utilization impact inflation?

2. Another key term Safire identifies as “Fedspeak” is accommodative. When applied to policy, Safire says that this code word is supposed to mean “low interest rates that boost the economy.” Some economists refer to a neutral interest rate; that is, a rate which makes actual output in an economy grow at the same rate as the economy's capacity or potential output. The Fed never uses the term neutral interest rate, but if they did, how might they explain the reason for the switch from saying that "policy accommodation can be removed" to "further policy firming may be required?"

3. Safire calls the Federal Reserve a “House of Hints” because it uses these somewhat obscure “code phrases.” Why isn’t the Fed more straightforward? Ip suggests that the Fed relies on “Fedspeak” to retain flexibility in its future policy prescriptions. Can you think of any other reasons why the Fed would speak so cryptically? Imagine that you are the Fed Chairman--an official who is confirmed by Congress and oversees a body (the Fed), whose powers are determined by Congress. Further, imagine that it is an election year, and some politicians running for office are looking for a chance to get some media attention. What type of language would you use if you were considering implementing tighter (i.e., higher interest rate) monetary policy?

Topics: Monetary policy, the Fed, Interest rate

Labels: ,

1 Comments:

  • At 7:34 PM, May 01, 2006, Blogger Stephen said…

    We will (maybe, probably, likely, for certain) enacting a

    Free Money
    Cheap Money
    Fair Money
    Taut Money
    Tight Money
    Luxury Money

    policy.

     

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