Ben Bernanke has been keeping an eye on how Mark Carney has been fighting the financial crisis.
The U.S. Federal Reserve chairman cited the Bank of Canada governor’s conditional commitment in April, 2009, to keep its benchmark interest rate unchanged at 0.25 per cent until June the following year as a “successful” experiment in central bank communication.
“This commitment was successful in clarifying for market participants the bank’s views on the likely path of policy rates and appears to have helped reduce longer term interest rates,” Mr. Bernanke said in a speech at the Federal Reserve Bank of Boston’s annual economic conference on Tuesday.
Mr. Bernanke’s remarks are further evidence that the Fed’s next policy innovation is likely to come in the form of more explicit guidance for investors. In fact, Mr. Bernanke’s speech is a small step in that direction, making explicit what was implied in the latest minutes of the Fed’s policy committee.
The Bank of Canada’s experience with a conditional commitment is of interest to the Fed because it is struggling to come up with the right approach to bolster its own guidance. The Fed has pledged conditionally to keep rates extremely low until the middle of next year, but U.S. policy makers have yet to state clearly what would cause them to change course ahead of schedule. (Investors in Canada were guided by the central bank’s inflation target of 2 per cent.)
The Fed “continues to explore ways to further increase transparency about its forecasts and policy plans,” Mr. Bernanke said.
Michael Gapen, an economist at Barclays Capital in New York, says this is harder than it sounds. The Fed’s job in coming up with a target is complicated by its dual mandate to achieve maximum employment and price stability. Mr. Gapen said in a note on Mr. Bernanke’s speech that coming up with a target will require the Fed to come up with a consensus and accurate view on the natural rate of unemployment, potential output and the relationship both those elements has with inflation.
“We believe the Fed is actively considering ways to clarify communication about its policy rate guidance,” Mr. Gapen said. “We believe that this is easier said than done and that providing more specific policy guidance would be difficult.”