The Federal Reserve press conference today has little to do with monetary policy and everything to do with public relations policy. The Fed has three immediate issues that need a makeover in public perception and explanation: inflation, quantitative easing and monetization of the debt, and Texas Congressman Ron Paul’s campaign for greater Fed transparency.
The first rule of public relation is get in front of the story. On two of these three issues the Fed is seriously behind the public narrative. On the third, quantitative easing, the Fed’s economic rationale and market reassurance are the orders of the day.
Recent Fed pronouncements on consumer inflation have been straight forward and reasonable from an academic and FOMC policy perspective. But for a public paying $ 4.00 for a gallon of gas and facing rapid and recurring food price increases, they are inadequate and leave the Fed open to charges of isolation from voters and the mainstream economy.
In the immediate aftermath of the financial meltdown the Fed’s main concern was deflation. Mr. Bernanke and the committee were worried that the rapid fall in employment and demand would cause a deflationary price spiral, when lack of demand forces firms to cut prices, and consumers, anticipating further falls in prices, delay purchases. Deflation is rare in expanding industrialized economies but it tends to reduce economic activity, which at the time was the last thing the Fed wanted. The Fed has also said on more than one occasion that inflation was lower than they wanted. In the economic context they were correct. In public perception it appears that the Fed favors higher prices, never a good policy for consumers.
The Fed and Mr. Bernanke have also said repeatedly and recently that the current rise in prices is transitory. It may be and the Fed may be accurate when they state that the core rate is actually a better predictor of future inflation than the headline number. But such statements are a cause for skepticism on the public’s part that Fed has the consumer’s economic interest at heart. There is also reasonable doubt that the demand side of food and energy price increases are as transitory as the Fed would like us to believe. If the developing world demand for better and more varied food and transportation is part of the story that is a part that is not going to change.
The questions and considerations of the singular Federal Reserve policies adopted in response to the financial crisis and recession also warrant greater public explication. Are Treasury purchases and a vastly expanded balance sheet fueling inflation around the world? Mr. Bernanke says no, but there are many skeptics in the financial community and the general public. A press conference gives the Chairman a chance to expand his logic and justify the risks and rewards of his policies. A conference also gives the Fed a permanent venue for letting the markets know when and if changes in policy are being considered. One of the great risks of these unusual Fed polices has been a sudden depreciation of the dollar. So far, helped greatly by the EMU debt crisis, the Fed has avoided that penalty. It will now be easier for the central bank to give its rationales for QE a fuller and more provocative public hearing.
Finally, the Fed is aware of the change in the political balance in Washington. Ron Paul, the Texas Republican, has long been a proponent of greater Fed accountability. His House sub-committee now overseers the Fed. What better way to deflect some of Mr. Paul’s criticisms of a secretive Fed than to submit the Chairman to press scrutiny every six weeks. There is an election next year. It is conceivable that the Republicans gain control of the Senate and the Presidency. Why not address some of their topics now, before the political balance shifts and similar openness become imperative.
On each of these topics, inflation, Fed policy and the political future of the institution, there are clear imperatives for the Fed to become a more conscious maker of public opinion.
Chief Market Analyst
FX Solutions, LLC