Fed to Study Ways to Improve Policy Guidance

Federal Reserve Chairman Ben S. Bernanke has asked his lieutenant to study how the Fed communicates with financial markets, just as the central bank’s ability to give clues on future policy has all but evaporated.

Minutes from the Fed’s May 10 policy meeting released last week showed that Fed Gov. Donald Kohn would lead a committee to “frame and organize discussions of a broad range of such issues over coming meetings.”

Fed Vice Chairman-designate Kohn will have a lot to mull over as he considers the best way to boost transparency, including defining a numerical range for long-term price stability -- a step that would galvanize debate about whether the central bank should at some stage adopt a formal inflation target.

Bernanke is a public advocate of such a target and has said he will seek a consensus among his Fed colleagues to move the central bank in that direction.

But economists think that it is unlikely that Kohn, who has been publicly skeptical about the benefits of surrendering central bank flexibility in favor of an inflation target, will use this exercise to pursue what is fundamentally a policy issue.

“If Bernanke was trying to move toward an explicit inflation target, it would be unlikely he would appoint Kohn to head the committee,” said Lynn Reaser, chief economist at Bank of America Capital Management.

World financial markets have enjoyed two years of clear guidance on future policy from the Fed as the central bank raised interest rates at a “measured” pace every meeting since June 2004. But those days are over.

Bernanke wants to improve policy transparency because he thinks this makes the central bank’s task easier. However, he has taken charge at a point in the policy cycle when interest rates have already risen substantially and the Fed does not appear to have much further to go.

Separately, Bernanke said in a speech Friday that America’s productivity had been bolstered not only by the use of computers and other technologies but also by the economy’s flexibility.

Those were some of the explanations the Fed chief offered to explain why productivity since 1995 had been growing at a significantly faster rate than it had in the previous two decades.

“The current productivity revival still has some legs, as the full economic benefits of recent technological changes have not yet been completely realized,” Bernanke said.