Yet another perception problem at the Fed

FWIW, I am a fan of Narayana Kocherlakota.

A few years back, he was able to look at the evidence and change a previously-loudly-expressed view on an important policy issue. Leaving aside, whether that view change was correct, it suggests open-mindedness and honesty. And his dovish instincts were to my taste.

A couple weeks ago I mentioned to him on Twitter that HE should be Fed chair. But he likes academia and the midwest too much.  Surely that is the only constraint! 😉

But I am going to pick on him a bit today because he demonstrates what I think is a bad habit among Fed “types.”  That is, he mischaracterizes an issue of substance as one of perception. Ever since the Crisis, the Fed leadership has been doing this a lot. And while the world is probably indifferent to my feelings, I find that irritating.

Being human, the Fed members are not sure what to do on policy. Occasionally, they have given bad economic forecasts or written down the wrong interest rate dots. And sometimes they have cut corners and been a bit too convenient about how non-conventional policy is supposed to work.

Rather than subsequently say, sorry, human imperfection, they drone on about how difficult “communication” is. And then the Fed watchers blame the public for not being bright enough to understand all the super complicated things the Fed must do.  I find that irritating. It makes me blog.

And now here comes Dr. Kocherlakota making the very good point that the Trompe Administration should not choose as its next Fed chair somebody whose only skill is to make a pile of money on Wall Street.

Dr. K. points points out some of the key requirements for being a successful Fed Chair, and specifically mentions a couple candidates (aside from Yellen) who have those qualifications.  He then graciously concedes that Wall Streeters have some “inside” knowledge about how markets work which could be useful, just not dominantly so.

But he concludes by insisting that picking a Wall Street type would create the “perception” that monetary policy is being run solely for the benefit of the plutocrats. That’s it. After such a great essay, all he has is perception? Sorry to be rude, Dr. K., but I find it hard to believe that you even believe that that is the only issue.

Anyhow, this complaining about perception (or the difficulty of communication) when the real issue is substance seems to be a big and enduring thing. The most impressive manifestation of it these days is the silly claim that Wall Street does not know what the Fed’s rates dots mean. Apparently, the dots are not forecasts or something. Stanley Fischer provided the apparently required jesuidical casuistry in his latest speech.   It is so silly.

The issue with the dots, as I see it, is twofold. First, the Fed cannot forecast interest rates.  No biggie. Their job is not to forecast interest rates, although making promises about them may be appropriate when stuck in liquidity trap.

Second, the logical case for rate guidance came with liquidity trap and disappeared with the (possibly temporary) escape from liquidity trap, as I explained here.  It is not that Wall Street is too dumb to understand, although they too suffer from human frailty.  Rather, the Fed has retained interest rate quasi-guidance out of what seems to be mere inertia.

This is not some huge problem for the practical effects of policy. But it explains the Fed’s discomfort here more accurately then their silly claim that we are too dumb to understand what they mean when they say collectively, “I think a 1 1/8% funds rate would be nice.”

I wish Dr. K. had not piled on with that “perception” stuff. In my view, it just further adds to the confusion, distracting unhelpfully from issues of substance.