When the Federal Reserve last neared a period where removal of accommodation was to be the intent of monetary policy actions, the concept of normalization had a singular reference – the level of support provided. Normalization from a period of excess accommodation required the Fed simply to increase the Fed Funds rate. Today, economic support is provided by the Fed in the form of extraordinary accommodative monetary policies. These policies are extraordinary as much in their abundance as in the method of operation. In Fed Chair Yellen"s view, normalizing monetary policy today involves two separate goals - adjustment to the stance or level of accommodation provided and also a return to prior methodology of operations.
Before proceeding with a brief discussion about communication and normalizing monetary policy, we might quickly dispense with a view of the prospects for immediate outcome from the forthcoming FOMC meeting. First, the Fed has done a wonderful job of adhering to a policy path for reducing securities purchases (tapering). It is expected to again reduce by a total of $10b, the level of agency mortgage-backed securities and Treasuries purchased monthly to new levels of $10b and $15b respectively. In the statement, the Fed may recognize a somewhat stronger pace of economic growth and employment gains since the last meeting, but would then also likely reference the mixed performance of the housing market. Finally, the forward guidance on Fed Funds will likely not be changed. At some point, the Fed will introduce additional guidance both for policy rate and the balance sheet, but it is not expected at this meeting.
Normal is as normal does
Janet Yellen was charged in 2010 by then Chairman Bernanke to lead a FOMC subcommittee on communications. As such, we might look to her assessments described in an April 2013 speech "Communication in Monetary Policy" to better understand her interests for the direction for monetary policy communications and implications for operations. In doing so, I think you will agree that Chair Yellen has indicated a desire to return monetary policy operations toward a more old school Fed Funds based approach. At the same time, she has a strong belief in the benefit of guidance.
While it is difficult to imagine any striking change to the message immediately following this meeting, the Chair recognizes the importance of the post-FOMC statement: "The Committee's most watched piece of communication is the written statement issued after each of its meetings, which are held roughly every six weeks. It may seem quaint that my colleagues and I continue to spend many hours laboring over the few hundred words in this statement, which are then extensively analyzed only minutes after their release."
In general, we understand that if there is a nuanced shift in describing something in the FOMC statement, it is not likely a mistake but rather an attempt to reshape consensus view.
There were several instances within this speech where Yellen made reference to "normal" monetary policy and an interest in returning to such. In referencing a long road to recovery she noted, "I am encouraged by recent signs that the economy is improving and healing from the trauma of the crisis, and I expect that, at some point, the FOMC will return to a more normal approach to monetary policy."
Having recognized the amazing advances in pace for all measures of public communication, she advised, "The revolution in the FOMC"s communication, however, isn't about technology or speed. It's a revolution in our understanding of how communication can influence the effectiveness of monetary policy."
It is apparent that the Fed under Janet Yellen will go to great lengths to achieve higher levels of monetary policy effectiveness through communication.