At 9:10 on Wednesday, November 14th Fed chairman Ben Bernanke gave a rousing speech at the CATO Institute concerning transparency of monetary policy and future Fed movement. Since it took about an hour to say, I’ll do my best to hit you with the highlights.
Ben reiterated that he practices a method of policy orchestration called Inflation Targeting, then promptly conceded that a single-minded focus on the economy is ill-equipped to handle the dual mandate of the Federal Reserve (to maintain price stability and maximum employment). This led him to announce his shift towards a more “flexible” inflation targeting approach (another hint at soon-coming rate cuts). He also noted the importance of policy transparency for investors in our economy. To that end, the following changes are being implemented:
1) The Fed will be increasing the horizon of financial forecasting from 2 to 3 years (evidently they added a turbo-charger to their crystal ball)
2) The Fed will be doubling the number of annual forecasts from 2 to 4 times per year
3) The Fed will post all the differing opinions of the various Fed governors as opposed to giving a homogenized position, allowing the general public to better understand the dispersion of viewpoints at any given juncture
4) This speech coming on the coat-tails of Bush’s address to the nation on economic condition (where he pounded the word â€˜resilient’ into listeners’ heads as hard as he knew how to) is, in my humble but accurate opinion, a great thing. The top dogs letting us peons know what is coming on a more regular basis should smooth out some of the volatility that we have seen of late (in the form of triple digit swings in the Dow Jones Industrial Average almost daily). Bernanke also admitted the inherent flaws behind economic forecasting, when he was quoted as saying:
“The only economic forecast in which I have complete confidence is that the economy will not evolve along the precise path implied by our projections. Nevertheless, as I have already noted, because policy affects spending and inflation with a lag, Committee members have no choice other than to make medium-term forecasts–provisional and subject to uncertainty though they may be.”
Wise words, Grasshopper. Wise words indeed.
What does all of this mean? God willing, it means greater stability and less emotion-driven swings in the market. Speculation will continue to generate market volatility, but a â€˜helicopter view’ of the economy from the perspective of the Federal Reserve should have a positive, placating effect on out investing populace.