Friday, October 31, 2014

FOMC Statements Have Grown in Size and Complexity

Rubén Hernández-Murillo and Hannah Shell from the St Louis Fed write:
Over the years, the Federal Reserve has developed numerous communication tools aimed at increasing transparency. One tool in particular has evolved significantly—post-meeting statements by the Federal Open Market Committee (FOMC), the body within the Federal Reserve in charge of setting monetary policy. The FOMC began releasing these statements in February 1994. Initially, the statements provided
a brief summary of policy decisions and were released only if there was a change in the policy stance. Since the May 1999 meeting, the FOMC has issued a statement after every regularly scheduled meeting.  Today, the statement details the FOMC’s views on the current and future state of the economy, current policy choices, and the likely course of future policy decisions...

During Federal Reserve Chair Alan Greenspan’s tenure, which lasted until January 2006, FOMC statements averaged 210 words with a reading grade level of 14. The statements continued on this track with Chair Bernanke from March 2006 until the end of 2008, when they started to change dramatically with the onset of the financial crisis and the beginning of so-called unconventional monetary policy.5 By January 2009, the statements were over 400 words with reading grade levels around 16.

Under Chair Yellen, the FOMC issued five statements from March to September 2014. The first four exceeded 800 words and had reading grade levels of 18 or 19, suggesting that readers would require an education level of about three years beyond a four-year college degree to understand them. The September statement was over 900 words but scored a 14 reading grade level because it used shorter sentences.

Our analysis indicates that, while the FOMC has lengthened its post-meeting statements to provide more information about policy decisions, the statements have increased in complexity.
I would argue the statements have increased in obfuscation, rather than simple complexity. And the "advanced reading grade level" of the papers does not necessarily reflect deeper discussion of monetary theory. As I pointed out in The Fed Flunks, comments by senior economists at the New York Fed, that were made to me, indicate that they are pretty much clueless about the Austrian School, and Chicago School, of economics.

Further, as I regularly point out in the EPJ Daily Alert, since Janet Yellen has taken over as Chair of the Federal Reserve, not once have the words money supply appeared in an FOMC statement. The  words have not appeared in any of her speeches and she has not used the words at press conferences.

Since, from somewhat different directions, both the Austrian School and the Chicago School, consider money supply growth as the foundation for understanding economic developments such as the business cycle and price inflation, it is really quite stunning that the Yellen led Fed appears to have no focus on money supply at all, despite her longer and more "complex" communiques.

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