Monetary Policymakers Need to Show Their Work—and Congress Should Help

The reduction in communication under Fed Chair Kevin Warsh has demonstrated that the FOMC’s march toward transparency since Alan Greenspan was neither inevitable nor irreversible. So far, Kevin Warsh’s Fed seems to treat obscurity as a virtue.

This backsliding illustrates the need to reevaluate and codify both the Fed’s operating procedures and Congress’s role in monetary policy. To protect operationally independent and economically sound monetary policy, central bankers should publicly communicate their forecasts and how they will achieve their mandate. Rather than treating monetary policy as an esoteric ritual of the temple priesthood, Congress and the Fed should work to make monetary policy decisions legible.

The Fed should provide more information to the public, not less. In particular, the Summary of Economic Projections (SEP) should be expanded, mandatory, and have names attached. These releases should be structured to make it easy to assess forecast assumptions and sources of error after the fact. In addition to providing information about where the economy is headed, the frequent release of information would facilitate Congress’s, and ultimately the public’s, assessment of whether monetary policymakers are fulfilling their mandate. At the same time, Congress should reinvest in its capacity to understand and evaluate the Federal Reserve’s macroeconomic decisions. This could make the semiannual Monetary Policy Report hearings genuinely productive and informative.

Some FOMC members will bristle at the costs of generating public-facing forecasts. Indeed, Warsh has argued that public predictions are apt to become calcified. It’s not obvious whether this is because they are public or merely because this is a feature of the forecasting process. But the benefits of transparency—incentivizing accurate forecasts, providing democratic oversight, and informing the public—outweigh the costs. Given Fed officials’ indirect accountability to the public, they should provide more transparency into their views and policy motives, not less.

The Recent Move Against Transparency Is Ill-Conceived

FOMC members are entrusted with profound authority. Accordingly, the bar for what they keep secret should be high; ordinary people deserve to understand what public officials are doing and why. That principle aside, public opacity generates real costs. Monetary policy will never be boring for financial markets, so providing vague information forces market participants to expend unproductive effort psychoanalyzing officials and parsing hints. Unnecessary secrecy makes it difficult to trust that Fed officials are truly keeping everyone in the dark. And while financial volatility may be exciting for market watchers, it increases the costs of productive investment by raising risk premiums. A salutary benefit of the more systematic policy of the past few decades is that monetary policy shocks are harder to find—surprises from the Fed have not been a source of business cycle fluctuations.

Warsh has argued that he prefers a quieter Fed so that markets can react to data—as if holding still will make financial markets forget the central bank is reacting as well. But Fed officials’ words and actions matter for financial markets; economists may debate magnitudes or the precise channels, but the link between monetary policy expectations and interest rates is clear. Markets will inevitably form beliefs about the Fed’s expectations and future actions. The question is how much trading will be driven by speculation about the Fed’s motives versus fundamentals. Clear information can help households, firms, and financial market participants focus on other aspects of their economic environment.

Obscurity also risks the Fed’s credibility and public confidence. Although President Donald Trump’s attempts to lean on the Fed are particularly unsubtle and egregious, he is not the first (nor will he be the last) president to attempt to influence monetary policymakers’ decisions. A lack of clarity about what central bankers think and why they act raises questions about whether Fed officials are making policy based on political considerations, rather than a sober assessment of the data. If the public wonders whether Fed officials are “wishcasting” or playing politics, inflation expectations are more likely to disanchor and create higher inflation and unemployment over the long run. The Fed’s best defense of its credibility is making monetary policy systematic; policy will not be boring, but it will be obvious. If the Fed follows its mandate and explains its choices, the public will have greater confidence in its actions.

The Fed should commit to—or, if necessary, Congress should compel—more frequent, useful, and structured communication about its outlook and plan to achieve both price stability and full employment.

Greater Transparency, Rather Than a Return to the Pre-Warsh Standard

The dramatic shift in communication strategy under the Warsh Fed highlights the chair’s power to shift substantive aspects of policy, even if only through a single vote at the FOMC. But monetary independence does not eliminate the responsibility to explain. The Fed should commit to—or, if necessary, Congress should compel—more frequent, useful, and structured communication about its outlook and plan to achieve both price stability and full employment.

A Not-So-Radical Approach to Forecast Disclosure

Currently, the SEP is (apparently) optional, and individual forecasts are anonymized for several years. But the Fed should adopt (or Congress should require) a practice of releasing individuals’ deanonymized forecasts more frequently—perhaps with the minutes of FOMC meetings. Individual FOMC members should be expected to identify and explain their modal forecast.

Public forecast disclosure creates a reputational incentive to be accurate. It clarifies how FOMC members view the economy, how they understand monetary policy transmission, and why they think the current interest rate target is the right one. If a member of the FOMC makes predictions systematically at odds with realized outcomes, the public, Congress, and regional bank board members should know that. They should also be able to tell whether forecast errors stem from unanticipated shocks, errors in strategy, or a mistaken model of the economy. 

Systematizing the release of forecasts aids external evaluation (and perhaps forces officials to confront the internal consistency of their model of the macroeconomy). The SEP, by providing a limited set of anonymous point forecasts and remaining optional (for the chair, at least) provides much more limited accountability. Keeping forecasts private short-circuits the feedback mechanism of confronting one’s errors and learning from them. That self-examination is difficult and runs afoul of the human tendency toward confirmation bias, but FOMC members owe it to the public. Timely disclosure makes wishful thinking (or saying what you think the White House wants to hear) more reputationally costly, better aligning members’ incentives with the public interest.

In addition to providing more complete information, mandatory disclosure avoids the problem of “man-bites-dog” signaling—where the decision to disclose the forecast becomes a source of news in itself. And it ensures that dissenting views are fairly represented and the reasoning for dissent is clear.

Admittedly, not every FOMC member is an experienced forecaster. Some may be uncomfortable translating intuition, qualitative intelligence, and quantitative data into a numerical forecast. At the same time, the Federal Reserve System employs some of the world’s best macroeconomists to prepare forecasts before each FOMC meeting. Even those policymakers who are not econometric experts work with their staff to clarify their views and translate them into numeric predictions before making an ultimately quantitative decision: What is the appropriate interest rate? While Chair Warsh is correct that economics is not physics or math, it turns out that math does help.

Transparency Is a Risk, but So Is Secrecy

Some may oppose forecast disclosure as a form of forward guidance that increases the “odds of being wrong at turns.” An incorrect public forecast may be a source of embarrassment for policymakers, but helping public officials avoid embarrassment isn’t part of the dual mandate.

The chair could cultivate a culture of rational expectations on the FOMC, and Congress could clarify that forecast errors alone are not cause for removal. The clarification of forecast priors by officials may make certain FOMC members less persuadable in the meeting, but this must be weighed against the countervailing benefits of public accountability.

The Trump administration’s threats to operational independence have damaged the presumption of good faith. Transparency involves costs, but it is a necessary step to reassure the public that electoral considerations do not drive policy. Structured, public disclosure of forecasts is better than a system where candor is selectively offered.

If individualized, public forecast release is a bridge too far, alternative options could provide useful information and a degree of accountability. For instance, the Federal Reserve Board of Governors staff could release their “Tealbook” forecasts alongside the meeting statement or minutes, and FOMC members could release individual statements explaining where and why their views differ from the staff’s. While this would make it harder to assess the sources of individual forecast error, it would help identify the consensus view, ensure dissenting voices are represented, and force monetary policymakers to put some skin in the game.

Congress Also Has Work to Do

The Constitution vests Congress with the responsibility for regulating money’s value. But anyone who has watched confirmation hearings for members of the Fed Board of Governors or the chair’s testimony can attest that many congresspeople appear to have a tenuous grasp of monetary policy and macroeconomics in general. At best, some members ask sharp questions about regulatory mandates and banking.

Americans deserved to know Kevin Warsh’s substantive views on macroeconomics before he got the job. His confirmation hearing didn’t cover basics like how he would deal with a recession, much less why he was so unusually pessimistic about the economy’s capacity in his previous stint on the Board of Governors or whether he had revised his thinking in light of his forecast errors.

The Federal Reserve is held accountable only indirectly through its semiannual reports and during the confirmation of its Board of Governors. While legislators have wisely granted the FOMC operational independence, that does not mean they should not be proactive in communicating their concerns. The Fed’s legitimacy is enhanced if Congress is its partner, providing oversight and eliciting plain-language explanations of how monetary policy supports the dual mandate. But congressional oversight only works if members can call on macroeconomic knowledge to understand monetary policy.

Congress should invest in its own capacity to assess and report on monetary policy—including establishing nonpartisan career positions with pay competitive with Fed staff. The relevant House and Senate committees should release their own assessments of whether the monetary policy stance is appropriate to satisfy Congress’s dual mandate. These reports should accompany the chair’s semiannual Monetary Policy Report and help congresspeople identify productive questions and develop other legislation. Additionally, it may be useful to increase the frequency of committee briefings or testimony, both for Fed accountability and, as argued elsewhere in this series, to sharpen Congress’s focus on a strong macroeconomy. Of course, monetary policy is only part of the overall picture. Changes in interest rates cannot substitute for sensible regulations, enforcement of rules against predatory practices and wage theft, or investments in government capacity in other areas.

Congress could also do more to protect its monetary policy prerogatives, ensure operational independence, and support the execution of monetary policy. It should clarify guidelines for removing Fed officials and rebuff malicious investigations. Congress should also recognize that operational independence requires avoiding the temptation to insert itself in the management of Fed research activities. The Federal Reserve System benefits enormously from being a destination for the world’s best macroeconomists, and intellectual freedom is one reason it has been able to attract high-quality staff. In the same way that the Fed should be researching “nonmonetary” topics like AI, it should be given latitude to study topics like climate change and racial inequality.

Accountability Is a Two-Way Street

In his 2014 review of the Bank of England, Kevin Warsh wrote:

The same is true for the Federal Reserve. Credibility is hard-earned, and while policy errors can damage it, so can concealing motives or mistakes. Experience makes clear that operational independence generally achieves better macroeconomic outcomes, so we must ask how elected and appointed officials can maintain that independence while also facilitating broad-based participation in economic and civic life.

Without knowing what policymakers believe, it is hard to hold them accountable. Accountability may be uncomfortable, but it should be the cost of being a public official imbued with incredible responsibility.

Monetary policymakers must reject the atavistic tendency toward secrecy. They should explain their views on how the economy works, the state of the economy, and the appropriate policy stance. They should do so clearly, providing enough information for outsiders to probe their assumptions and, when inevitable errors occur, identify the source. Without knowing what policymakers believe, it is hard to hold them accountable. Accountability may be uncomfortable, but it should be the cost of being a public official imbued with incredible responsibility.

Accountability is a two-way street, and Congress needs to step up. Members should invest in the human capital necessary to meaningfully engage with the chair’s testimony. Regular congressional assessments of monetary policy performance would be one way to strengthen substantive dialogue between Congress and the Fed and (re)establish that monetary policy is a creature of Congress, not the White House.