Wednesday, July 06, 2005

What does the Fed look like after Greenspan? 

There was a panel discussion here at the Western Econ meetings in SF this morning which included Milton Friedman, Anna Schwartz, William Poole (president of the St. Louis Fed) and Lee Hoskins (past president of the Cleveland Fed). Fascinating talk. Here's a copy of Poole's remarks. Here are some other notes I took.

Friedman went first, as he should. While complimenting Alan Greenspan greatly, he asked whether Greenspan is so special? Ccharts for inflation for NZ, AUS, and UK showed that the reduction of inflation in the US was matched elsewhere. "What we need isn't fancy rules or better econometrics but the will to impose a penalty for central banks to fail to provide for price stability." Those interested in these types of contracts would do well to read more on the topic from Carl Walsh.

Anna Schwartz (who co-authored the Monetary History of the US with Friedman) proceeded to offer a set of questions to ask the new chair (who should be installed around the end of January 2006.) She argued that the Fed is quick to lower rates in time of crisis (or one forecasted) but not to raise them later when there is a need to either slow the economy or withdraw liquidity inserted for a forecasted crisis that didn't happen. She also believed the Fed relies too much on interest rates right now.

She went on to discuss with Poole the types of statements made by the Fed when policy changes are made. Poole argues that transparent communications are important, though he fears what happens when the Fed makes a statement that it will raise interest rates at the next FOMC meeting (six weeks later -- FOMC is the committee that actually sets the targets) but events make it change its mind over that time. I wondered if the Fed should have a blog? Some outside the Fed are trying, and at least one inside economist offers insights as well. Schwartz was much more negative, saying she would ask a new Fed chair, "Will it be a priority under your leadership to communicate to the markets and the broader public the facts and also in depth analysis and explanation of what led to Fed decisions?"

All the participants thought the Fed could and should directly target inflation; Lee Hoskins was the most negative, saying the Fed could do it now without legislation but wouldn't for fear of annoying Congress.

The question that hung out there is whether post-Greenspan, the inflation performance we've had will survive. The new chair will have a good Board of Governors, a good baseline for inflation and a great deal of credibility as anti-inflation left by Greenspan (whether deserved or not). Where it goes from there is anyone's guess. As came out during the discussion, it's not like the demand for the inflation tax -- "the only tax you don't have to pass legislation for" in Friedman's terms -- has gone away.