Ellen Meade is a research professor of economics at Duke University and a veteran of the Federal Reserve System. Most recently, Ellen served as a special advisor to the board and Vice Chair, Richard Clarida. Ellen joins David on Macro Musings to discuss her research on monetary policy and her work at the Federal Reserve. Specifically, Ellen and David discuss the prospect of central bank independence at the Fed and the specter of fiscal dominance, the recent history of secrecy and transparency at the Fed and how that impacts the incentives to dissent, the effect of the Fed’s forward guidance on recent policy events, what lessons from the past two years the Fed should incorporate into its next framework review, and much more.
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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: Ellen, welcome to the show.
Ellen Meade: Thanks, David. It's great to be here.
Beckworth: Well, it's great to have you on, we've had some interactions in the real world, not just online. I first met you through Chris Crowe who's a co-author of yours and you wrote some papers together on the independence of central banking. And then we had some interactions actually at the Federal Reserve. You worked for Vice Chair Rich Clarida as I mentioned, and you've had a pretty storied career. So maybe walk us through that, Ellen. Tell us about your career journey. I know you've been an academic, you've been a central banker, so tell us all about it.
Meade: Thanks. Yeah, so I came out of graduate school in the middle of the 1980s, which is a long time ago, and the issues in the economy were a bit different than they are today. Although there's some common elements like inflation and the aftermath of inflation. I went directly to the Fed after graduate school and worked in the international finance division. So at that time I was working on issues like US current account sustainability and the dollar. I then migrated over to work on Germany and the Euro, which was a project that went on all the way through the 1990s.
Meade: And in the middle of that I spent a year at the Council of Economic Advisors ironically in ’94, ’95, when the Fed was going through the hiking cycle that everyone's talking about so much today. And so that's a very interesting memory for me. In the late 90s I left the Fed because my husband was offered a position in London, at City Group, and we moved to London and I became a research fellow, senior fellow in the Center for Economic Performance at the LSE. And LSE is an amazing place to be. Lots of intellectual vibrancy, tons of people circling through London all the time to give talks and what have you, and it was a very interesting time of my career. And I met Chris Crowe while I was there because he was a graduate student in the economics department. And he started off actually as my research assistant working on some other stuff for me and we co-taught classes in Bosnia and Syria together.
Meade: For the UK government, which are very interesting, probably the most interesting experience I had, one of the most in my career anyway, but I ended up leaving. I left the Fed at the end of ’99. I was over there from 2000 to 2004. Came back to Washington, spent a year at Brookings and then took a position at American University in the economics department. So that was really then an academic career that I did some publishing while I was at LSE. I continued back at AU. And then in 2011, the Fed came back to me and said, "Oh, do you want to come back?" And I'd been working on FOMC matters , voting and governance, and central bank independency, transparency. And they said, "Would you like to go work directly on the FOMC and be in the division of monetary affairs?" And it was a very attractive offer. So I said yes. And that's where I spent 10 more years back at the Fed, but doing very different things from the earlier time.
Meade: I will make one note for younger people listening to your podcast who are trying to figure out their careers. I didn't have a grand plan in mind while I was doing this. I was balancing two children and my husband is also an economist and he had different interests from me and we were trying to just figure it out, right? And it led to interesting experiences. I'm glad I made the changes I did at the time I did, even though it wasn't always clear to me what was coming next. But I think as I reflect back on it, it's been an interesting journey.
Beckworth: No doubt. And what a story. So you and Chris taught in Bosnia. That must have been fascinating.
Meade: There's a Center for Central Banking Studies at the Bank of England. And at that time, it was mostly engaged in technical assistance work. It had been from the fall of the Berlin Wall and the former Soviet republics coming and needing assistance. And Bosnia fell into that category, even though it was the fall of 2003 when we did this, and we tried an intermediate macro class in a concentrated form like you would do for an executive program, over the course of a week to people in the Central Bank in Sarajevo and their statistical agency up in Pale, which has a very, very interesting story. Because in one of the coffee breaks, one of the people in the class who was part of the statistics branch and therefore Serbian in Pale, I had been told by another person in the class who was Bosnian Muslim, that the Serbian's father had killed the Bosnian's father.
Meade: So there were incredible underlying tensions amongst the individuals in the class. They were all very friendly, of course, but it only became apparent over the course of the week there. We heard many stories and one of them I carried forward into the classroom with me, which is similar to the classic story in a textbook about prisoners of war and selling cigarettes. It was that during the Civil War there, the newspaper continued to be published every day in Sarajevo. And there were about four or five copies printed and the newspaper guy would stand on the corner of one of the central streets as the bombs were flying overhead. And one man from the central bank told me this story. He would walk out, he did not smoke, but he always bought cigarettes and in exchange for cigarettes he could read the newspaper as long as it took the newspaper man to smoke the cigarette, then he would have to give the guy another cigarette.
Meade: And that's what you do in situations like that. Of course, there was also hyperinflation going on. So cigarettes had tremendous value.
Beckworth: That's an amazing story. And another data point for the “cigarette is money” teaching example. That's great. Now, you mentioned you also worked in the Monetary Affairs Division at the Board of Governors. I know a few people who've worked there. Bill Nelson. He has been on the show a few times. He's a former colleague of yours, but what a neat place to work. And we were talking earlier before the show, I wanted to share this with our listeners, for you and all the other people that work there it's like one big macro economics department. I was sharing with you that I taught at some state universities and we had a few other macroeconomists on staff, a whole lot more applied micro folks, but that must have been like macro heaven, just being surrounded by all these macroeconomists. Probably lots of curiosity, lots of interesting intellectual conversation. So tell us about that environment.
Meade: Oh yeah, absolutely. The Board is a terrific place. They hire PhDs in economics and finance. It's something like 410 of them. That's a lot of people. That was one thing that was very different from the later stint I had, 2011 to 2021, versus my earlier part of my career when the Board was a bit smaller before the financial crisis, when it then sought to expand and add a lot of finance expertise. But there is a tremendous number of seminar programs and workshop programs, very active researchers, all sorts of topics in the macro international finance area. And in banking too, but you don't find micro topics the way you might in a department or maybe a different agency of government. But it's just absolutely a very fertile place for doing research and a lot of terrific support for research in terms of data and research assistance and technical assistance and so on. So it's really an amazing environment.
Beckworth: Yes. And when I visited with you at the Board of Governors, I believe it was 2019, it was still open back then, you were the special advisor to Vice Chair Rich Clarida. So you were still in the Monetary Affairs Division, but you were like his special aid, his special envoy. Tell us about that role. What did you do for the vice chair?
Meade: Yeah, so these special advisor roles have evolved over the years and now virtually every governor has one or possibly two special advisors. And usually it's an economist, but if they have a heavy responsibility for supervisory regulatory things, so Randy Quarles’s primary advisor was someone from the Supervision and Regulation, but he also had an economist to help him, Joe Gruber, who's now the research director out in Kansas City, worked with Randy Quarles.
Meade: So Rich Clarida's role inside the institution was as overseer of the monetary affairs research and statistics and international finance divisions. He needed help covering that and he had special responsibilities for that. He was also, as you know, from the day he was sworn in asked to run this framework review, which we did over the course of a couple of years. And so I was his monetary affairs person and also his person on the framework review.
Meade: And he had a second person who was another economist working with him on research and statistics and international finance related things. But partly what we did was we helped with speeches. Sometimes we drafted speech material, but more often we coordinated other people drafting speech material. There's a lot of, as you can imagine, last minute details to getting a speech out. And of course there was a lot of work on the framework review or his other appearances and his role within the institution.
Meade: It's a fascinating job. I think one thing your listeners might not know if they don't know the Fed as an institution, is those 408 economists are all pretty separated in a way from the policymakers. You can think of it as layers in the institution. And when you become someone advising a policymaker who sits on the second floor, so we talk about it as “going to the second floor,” you begin to see the world in which they operate, which is quite different.
One thing your listeners might not know if they don't know the Fed as an institution, is those 408 economists are all pretty separated in a way from the policymakers. You can think of it as layers in the institution. And when you become someone advising a policymaker who sits on the second floor, so we talk about it as “going to the second floor,” you begin to see the world in which they operate, which is quite different.
Meade: And I think the point of keeping the staff somewhat segregated is the staff's forecast, the teal book forecast or whatever you want to call it that goes into the monetary policy meetings, it's really an independent staff forecast. So you don't want too much mixing if you will. Staff are exposed to policymakers. I don't want to make it sound like they aren't. But you want them to be able to be in their own world, if you will, to generate a forecast that's independent. So I think the typical economist experience, which was my earlier career, is that you're quite separated from the policymakers, maybe see them on occasion in a briefing or something. But not this latter part with Rich. The role I took up in the Fall of 2018. So yeah, it's very interesting.
Beckworth: Did you get a new office with that role closer to the Vice Chair?
Meade: I did not get a new office. You would think that you could get those second floor offices, but they were short supply.
Beckworth: Yeah. Those are precious spaces. Very rare real estate up there on the second floor. All right. Well, let's move on to your research. And I do want to come back to the framework review. It's great to have a former Fed insider who was there behind the scenes when the framework was being reviewed. But let's talk about your research because you've got some pretty well-known research on central banks as an institution. And we mentioned Chris Crowe, he's a co-author of yours on several papers that you did on central bank independence. And we'll provide links to those papers in the show notes, but maybe walk us through that work and then maybe update it. What relevance does it have for today?
Central Bank Independence
Meade: So at the time Chris and I explored this topic, which was the early 2000s, central bank independence was a topic of interest through the 1990s. The paper that kicked it off is a well-known Journal of Money, Credit and Banking paper by Larry Summers and Alberta Alesina that looked at OECD countries, which at that time were industrial advanced economies, not Mexico, not Korea, some of the more recent OECD members. So I think it was about 22, 23 countries and they looked at a correlation between inflation and a ranking of central bank independence, which they formulated, and found a relationship there that central banks with lower inflation rates had higher degrees at central bank independence. And they wrote this article, that then got a lot of attention and a lot of further research.
Meade: One of the real contributors to that literature is Alex Cukierman, who did a variety of studies, but one of the first things they did was to expand the set of countries to look at developing an emerging market of countries and find that that relationship wasn't so apparent for those countries. And why is that? Well, because there's a distinction between the independence that's in the law and the independence that actually exist. Do governments actually really grant the central bank independence from the rest of government in terms of financing deficits, say? So Chris and I wanted to update some of this work in part because with the fall of the Berlin Wall and a lot of new countries, former Soviet Union republics coming to the IMF for guidance, the IMF had basically advised all these countries in writing their central bank laws to make them very independent.
Meade: And we wanted to look at that. So we took some of the Cukierman data and one of their measures of independence that was from the late 80s, I think it was, and we revisited that index and reconstructed it based on the IMFs Database of Central Bank Law in 2003. It's a fixed point in time, but we had two points in time to do a comparison over. And what we found was that independence was ranged tremendously, but inflation was generally low. So you didn't find the correlation that Alesina and Summers had found. You found this puzzling, not clear statistical relationship that says that, gee, independence is a driver of low inflation.
Meade: And so we looked into that more across the two articles that we wrote and basically found that the countries that had really increased independence by 2003, the ones that started off with very low independence and very high inflation. So they had moved to increase independence over 2003. And if you looked at the change in inflation over those two time periods, the '88 Cukierman sample and our index, that there was a relationship, a strong statistical relationship, between central bank independence and the change in independence and the change in inflation. So that still supports the original idea. But I will say there are people who don't believe much in independence as a concept.
Meade: And I want to name a couple of them – Charles Goodhart, who was a co-author of mine on other work, was always somewhat suspicious about what independence was really measuring. And Adam Posen has written, back in the 90s, some well-known pieces, effectively saying, "This is all politics," right? That Germany's preference for low inflation and for independence came from this terrible experience of hyperinflation back in the 20s. And it's not this big concept that economists would like it to be. I think that our articles were published in the 2007, 2008 timeframe before two new ones got going.
Meade: But one of the main components of the central bank indexes that people looked at back then was whether central banks were on the hook for financing government spending, government deficits. There were many experiences in Latin America where high inflation in the 80s could be traced directly to the financing of government deficits. And so you ranked a central bank's laws by whether or not they were compelled to just finance. And then what do you do about a central bank that elects to purchase government securities for the purposes of stimulating the economy?
Meade: So not for the old age reasons of financing the deficit, but for QE purposes, that's a whole different kettle of fish. And so I think we talked now about independence, but that literature is not quite as clear cut as it was in the earlier days. Literature's do go through cycles and maybe our modern concept of independence, even I would say, should embrace the idea that if you're going to have QE, and there's probably no going back on that, if you have to have interest rates at zero and you're looking around for something else to do. But if you have to have QE in your toolkit, maybe coordination with the fiscal authority is a good thing so that you don't, for instance, have the fiscal authority issuing in the segment of the market that you're trying to purchase in and therefore offsetting what the central bank is trying to do. So I think it turns on its head a little bit some aspects of central bank independence that originally were thought of as motivational or sacrosanct.
If you have to have QE in your toolkit, maybe coordination with the fiscal authority is a good thing so that you don't, for instance, have the fiscal authority issuing in the segment of the market that you're trying to purchase in and therefore offsetting what the central bank is trying to do. So I think it turns on its head a little bit some aspects of central bank independence that originally were thought of as motivational or sacrosanct.
Beckworth: This is very fascinating. And I want to go back to this point, you made about Adam Posen and Charles Goodhart's critique. If I understand what you said, their critique is that independence is really just a symptom of deeper political preferences or what the body politic wants. So even if you are measuring something, it's really, does the body politic want price stability? And if it does, it's going to empower the central banks. Is that their critique, did I have that right?
Meade: Yeah, that's my recollection of what Adam was writing. And in definition, a country like Germany having lived through hyperinflation, the population had this preference for low inflation. And therefore the central bank's merely carrying out the population's preference. I think though that you do have to recognize that in the 1990s, starting with say New Zealand, '89 and '90 and the adoption of inflation targeting, there was a change in how the economics policy space and academic profession started to view the role of independent policy. The desire for a clear price stability mandate, and all sorts of things that go along with inflation targeting. And that did reform attitudes in countries that maybe hadn't had such a reputation for low inflation or a population that prefers low inflation the way Germany had.
Beckworth: Yeah, it was a very different period, especially compared to now, and maybe that whole period, that great moderation period, is more the exception than the rule. But it was a very interesting time, different time. And I think it's great that you stressed some central banks did take the initiative to aim for low inflation, this wave of inflation targeting adoption across advanced economies. I think that's an important story. We don't want to undersell it, but I do find it fascinating though that this deeper embedded story of political preference, what does the body politic want?
Beckworth: And I want to tie it to the present because in the late 2019, and really that decade leading up to that, we had price stability. I think we took it for granted. I did. And therefore it opens the door to look at other things that the Fed could do or that government can do. If price stability's given and people aren't worried about it, let's focus on other objectives. Let's focus more on the full employment side of the Dual Mandate, for example, or let's do other things. But now that we're with high inflation the number one polling issue is high inflation, and everyone really cares about it now.
Beckworth: And lo and behold, the Fed is back on mission to get inflation down. The intense focus, the redirection of their attention towards inflation. And you could tell this story that this interest from the body politic and therefore from the Fed and the Fed getting maybe the independence it needs to fight that inflation, that could be viewed as independence. But you could tell a story. Well, it's really coming from people who don't like seeing high inflation. Any thoughts on that current reflection on that point?
Meade: Well, I do think that some of the language you're hearing from the Fed right now, especially some of the things Chair Powell is saying, are very reminiscent of the way Alan Greenspan used to talk about inflation. And from being on the Fed staff in the 90s, I absorbed this view that even though the Fed had a dual mandate, it was a hierarchy within the mandate. Price stability was first because price stability laid the conditions for maximum employment. Well, this is exactly the message that Powell has gravitated towards over the last few months.
Meade: And I think that's maybe the right message. Maybe the message you have to be in if inflation is high, it's just that we have forgotten. As you said, we all had amnesia about what it looks like when inflation is unpredictable. It's very expensive to go to the grocery store and so on and so forth. I do agree with you that having inflation be so low for so long and estimates of its underlying trend being even below the Fed's 2% target, 2% goal, made us maybe a little relaxed. The VOX curve looked very flat. So it didn't seem like there was very much cost to inflation going up all that much. And now I think we definitely are rethinking that with the amount of inflation that has to be pulled out of the economy at this time. And then people saying, "Well, how high will unemployment have to go in order to wring that inflation out?" So maybe it provided scope to broaden the Fed's glance around other topics. I also think though the world has changed. Monetary policy's a blunt policy.
Meade: It's not a redistributive tool, I don't think, although sometimes I wonder with asset purchases and who are the asset bookers. Generally speaking, economists have regarded it as a blunt and not redistributive tool. But we live in a world where distribution issues now are front and center. So I think the Fed can't really get away without saying, "We need to understand how our policy affects all people." Understanding how inflation affects lower income people is very important. You're going to put a lot of them out of work. Right? So, I vote in terms of having an active research arm that is engaged in looking at these issues, regardless of whether inflation's low or high.
Beckworth: Yeah. This raises some interesting questions. And one I'd love to ask you. Number one, we're talking about how the body politic, Congress feeds into the Fed, maybe indirectly, and this might speak to a broader issue of maybe fiscal policy and possibly fiscal dominance. I don't think we're in a world of fiscal dominance, but this has come up recently. And I'm just curious, since you're someone who's been in the Monetary Affairs Division and you're doing hardcore work with other bright people.
Beckworth: And then you have people on the outside like John Cochrane, Eric Leeper, people who promote the fiscal theory of the price level. The Fed believes in its mission. It believes its goal is price stability and it has the power to do that. And then you get fiscal theory, the price level folks outside who are like, "Well, I don't know. I think it's more future fiscal path of policy." What do you guys think about those ideas when you hear them from people like John Cochrane and others? It's all about fiscal policy, the Fed has little role.
I do think that some of the language you're hearing from the Fed right now, especially some of the things Chair Powell is saying, are very reminiscent of the way Alan Greenspan used to talk about inflation. And from being on the Fed staff in the 90s, I absorbed this view that even though the Fed had a dual mandate, it was a hierarchy within the mandate. Price stability was first because price stability laid the conditions for maximum employment. Well, this is exactly the message that Powell has gravitated towards over the last few months.
Meade: Well, I think that it's hard to then see the justification for a central bank or at least a central bank that believes that it has power to directly affect inflation, right? I don't really subscribe to that view. And I think that it's probably not psychologically a good thing for a central bank to subscribe to that view, because then you would really question, what are you doing?
Beckworth: Why are we even meeting for the FOMC?
Meade: Exactly. In the recent monetary policy testimony, Chair Powell was asked questions about fiscal policy repeatedly. Because of course, right now, we're heading into an election and a lot of the members wanted him to support their view. And he said, "That's not my ballpark. I don't play in that lane." And that's certainly true, but I think if he really felt that fiscal policy was the only thing that mattered for the price level, maybe he should be more willing to assert a view. I just don't think the Fed operates in that paradigm.
Beckworth: Okay. So, most people there believe that they actually do have the ability to influence the path of the price level?
Beckworth: And the way I circle this wagon, because the fiscal theory of the price level, it's not unreasonable. It looks at the intertemporal government budget constraint. But the way I circle this and make sense of this is that we live in a world where monetary policy still has independence and there's not fiscal dominance. If fiscal dominance kicked in, then I think this would be more of a worry where the debt had grown to a level that's unsustainable. So in a case like that, if the Fed tried to tighten, it would only be increasing the number of government liabilities going out the door and further exacerbating maybe high inflation. But we're not in that world yet. So it makes sense to think about the Fed having control and guiding nominal demand in inflation.
Meade: So one thing to remember is there was an earlier time before interest rates were so low and I'm going back to the late 80s, early 90s, and Greenspan often in testimony would advocate for reducing the deficit. There's that famous thing from, I think it's Clinton's first State of the Union address, where Greenspan's sitting up in the balcony between Tipper Gore and Hillary Clinton to effectively demonstrate his support for Clinton's deficit reduction package, right? And Greenspan at times took quite a strong position. And I think if we were headed down that road, particularly if inflation stays high. So, the cost of financing, the deficit is much higher than we were anticipating it, there's room for the Fed to speak loudly about that I think. Not right now, not six months before an election.
Beckworth: Right, right. Well, that's a great example though. Greenspan's efforts, and to the extent they did influence Clinton and bringing down the budget deficit, in fact going into a budget surplus.
Beckworth: That improved the path of the US government's fiscal health, which therefore minimized fiscal dominance and empowered the Fed to be the agency that determines the price level path. So, Eric Leeper has this paper, I think he presented it at Jackson Hole, and he goes, "Look, there's this dirty little secret and the dirty little secret is that you got to have your fiscal house in order, in order for the Fed to be independent and do its thing." And what Greenspan was doing was just making sure that was happening. That's when we had to look at what his efforts were in the late 90s. So, super fascinating and super cool that you were there to be a part of that history. Well, let's move on to some of your other research and you've done some neat work on the transparency side of the central bank, the Fed in particular, and you have an article in the Economic Journal that's titled, “Publicity of Debate and the Incentive to Dissent: Evidence from the US Federal Reserve.” This was a really neat article. Walk us through it and its implications for today.
Transparency and Incentive to Dissent at the Fed
Meade: Yeah, that was one of my favorite things to work on. I had worked on a data set, putting together a data set with Chris Crowe actually at LSE, to catalog from the FOMC transcripts what people said rather than how they voted. Because you may know that dissents as a percent of total votes are very, very low, something like 7% on average. And that seems to be a relatively robust 7% regardless of the time periods used. But if you look more closely and you would read the meeting transcripts, at least I was doing this in a day before the Fed’s policy tools were complicated by forward guidance and QE. They were just voting on an interest rate at that point on the level of the policy interest rate, the Federal Funds Rate. And so I was looking at this from late 80s to late 90s. If you go back and look in the transcripts, what people will say is, "Well, I really don't agree with this today, but I'll give you my vote." Right?
Meade: So Greenspan always laid out the proposal that was being considered at the meeting. He always got what he wanted. And so people would be given some time to explain themselves and they would more or less always say, "I agree with you or I don't agree with you." But then they would give him their vote. So when you measured what they said, in terms of agreement or disagreement, you got something like disagreement on the order of 30%. Which was much closer to Bank of England, where policymakers at the Bank of England are individually accountable to parliament.
Meade: So they are, at least at the time, the discussion was they were thought to have to vote what they really thought. Whereas, Greenspan said publicly, I think it was in testimony, that he didn't really agree with that approach. That the Federal Reserve institution was responsible and therefore it was a collective decision and consensual, right? So we used that data, David Stasavage and I. David is a political scientist. He was at LSE at the time. He's now I think the Dean of Arts and Sciences at NYU.
Meade: But we used that data to look at whether there was a change around 1993, when the Fed began to release the transcripts of meetings with a five year lag. There was a big argument in 1992, 93, Henry Gonzalez was the Head of the House Banking Committee, the predecessor of the House Financial Services Committee, and he wanted to have the FOMC televise its meetings on C-SPAN. And so I think the letter to Greenspan originally went at the end of '92, but throughout '93, there were discussions. There was testimony. He brought other reserve governors and presidents, as well as Greenspan forward on a number of occasions to discuss this transparency issue and secrecy because the FOMC was meeting behind closed doors.
Meade: And during this year of testimony and correspondence, Greenspan happened to let out, I don't know whether it was a slip in the fall, that there were actual transcripts of the meetings. Because the meetings were recorded for writing the minutes. The recordings were transcribed and I've written minutes, so I understand how that process goes. The recordings were transcribed, the recordings were then destroyed, but the transcripts remained. And a number of FOMC policy makers did not know this. I personally think that Greenspan had been aware all the way along. It would surprise me if the chair were not aware, given what I have seen from the inside.
Meade: But I can easily believe the policymakers, the presidents of reserve banks who hadn't been at the board a long time, new members of the staff somewhere in the Fed system, didn't really realize this. After this political pressure they didn't want to bring C-SPAN into the boardroom. But what they did agree to do was publish transcripts with a five year lag. But the resistance to this, through the discussion was that it would make people less willing to speak their views, to speak their minds.
Meade: So what we did was use this data set that went from '87 to '99 and had a break in the middle right around '93 to test the hypothesis of did there appear to be less willingness to dissent in this voice way, not in your vote way, but in the voice way after '93 than before it. And we did find some evidence for that. There's been other work in political science looking at this issue. I don't think that everyone agrees. What you can tell though, if you are a reader of the transcripts, is that the conversation in the meetings is much more casual before. '93 is a year of transition so you don't want to look at '93 one way or another.
Meade: But before '93, discussion is much more casual. There's more frequent interruption, people a lot more back and forth. And after '93 people tend to speak in paragraphs as if their remarks are written, which in fact they are. From having attended meetings over the course of 10 years, there's still a very hearty debate. So yes, people read from prepared statements. But they're very thoughtful statements and they do have some back and forth, although it's much more limited than in the earlier period. But the way to think about the meetings, I think, and which this research has not really addressed, is that it's a dynamic conversation. It's not done on a meeting by meeting basis. I make some comments today, my colleagues might address them at the next meeting. It's a very rich intellectual discussion. We get together today, we make these statements, maybe we respond to them in real time but more likely we come back to them next time. And the conversation is continued over a series of meetings.
Beckworth: That is so fascinating. So it did change the tenor, the tone of the conversation, knowing that you're going to be recorded, which makes sense. Did these transcripts begin with Greenspan? He mentioned that he was aware of them, but did they predate him? Was this being recorded going way back?
If you are a reader of the transcripts, is that the conversation in the meetings is much more casual before. '93 is a year of transition so you don't want to look at '93 one way or another. But before '93, discussion is much more casual. There's more frequent interruption, people a lot more back and forth. And after '93 people tend to speak in paragraphs as if their remarks are written, which in fact they are. From having attended meetings over the course of 10 years, there's still a very hearty debate. So yes, people read from prepared statements. But they're very thoughtful statements and they do have some back and forth, although it's much more limited than in the earlier period.
Meade: Yeah, they did predate him. What my recollection is, is that when they agreed to start putting them up for release, and of course we didn't really have the internet or it was just the early days of the internet. So I'm not absolutely sure whether they were put up on the internet initially or how they were put up. I just don't recall. I remember accessing them. So maybe that's the case. But the Fed put up a certain number of years, and then it had to go dig out of the cellar earlier ones and it kept supply. Now, of course, they're up to date. And every year they released the transcripts from, well, they take the five years as literal. So they actually, at the beginning of a year, release the transcripts six years before. So we have 2016 now was released earlier this year, and next year we'll get 2017. But they put up now, not just the transcripts, but all the meeting materials.
Meade: You can see the agenda items, all the staff presentations, and in more recent years they've started putting up staff memos. That was while I was there, that we started publishing staff memos. Not all of them, they have the right to withhold. All of this could be covered as the argument was back in '93, by the caveat or the exemption from the FOIA, Freedom of Information Act, that allows you to withhold deliberation materials. And that's the reason where the story behind the five year lag, is that these are deliberation materials, they're effective in a decision. You don't want to hamstring people from making a good decision by releasing this stuff too soon. So that's the five year lag. You could put all the memos under that if you wanted, but the Fed has chosen to release a number of the memos. Many of which are very, very interesting if you remember to go search for them and you know what you're looking for.
Beckworth: Well, it's interesting that this was almost an accident. So, Greenspan slipped and revealed that they were available. But it also occurred at the time when there was increased transparency, right? So they started releasing the Federal Funds Rate and things like that. So was this throughout the 90s. My question is, would these transcripts have been released anyways even if Greenspan hadn't accidentally revealed them?
Meade: That's a good question. And I think the answer is probably over time. I could imagine that happening. Remember this happened before the February 1994 increase in the funds rate where Greenspan made the first statement, right? In the '94, '95 experience of interest rates increasing, that everybody's talking about today, that FOMC did not release statements back then. They only started releasing statements regularly, after every meeting in May of 1999.
Meade: So the 90s were a real period of transition and it followed from the central banks that adopted inflation targeting that had certain communications protocols that they almost put around themselves for releasing the decision that they had made in a real time way, right? And it comes about at the same time that the internet is exploding and taking off. So you can't delink the availability of materials that central banks started making available in the 1990s from the arrival of the internet. And I think the Fed was pulled into this to some extent by the practices of other central banks. But this transcript thing was an issue of its own making.
Beckworth: Yeah. So it's interesting to look back and see there was hardly any transparency. You literally would look at Alan Greenspan's briefcase and what he was wearing and such. To today where there's an embarrassment of riches, there's so much. In fact, I could ask this question, do we have too much? Is there too much information? What's the noise versus signal ratio? We've got testimonies, we've got speeches, press conferences, we've got the summary of economic projections. What is your sense that we've gone from one extreme and here we are, I think, at the other. Thoughts?
Meade: I agree we have a lot these days and we have a lot of commentators as well, and a lot of available information to purse through, all of which you're applying the what signal and what's noise tests to. Not just policymakers, but all the financial market newsletters and other analyses and Twitter.
Beckworth: And podcasts.
Meade: And podcasts. However, now that I'm on the outside and I watch speeches and things, and I have my own view of whose comments I need to attach weight to because they speak for Chair Powell or the thinking inside the board, inside the Eccles building. And sometimes I'm amazed at a participant who's not a voter, say not a voter this year. And therefore, if you're trying to put a decision together, I'm going to weight that person's view lower than the person who's going to be voting, but who might make a comment that's not in the mainstream and then the markets run after that comment, spend a week digesting that comment, trying to figure out is it important and market pricing moves around a lot.
Meade: I'm still surprised by that sort of thing. And you could say that's the role of markets, that's their job. Or you could say, well, maybe the central bank should just be a little more tight lipped. They're all in the meetings together. The meetings are generally... you get the sense that people are really glad to be speaking with one another. They uniformly say how important these meetings are for their own thinking. So why is it that they're not singing from the same page in the hymn book, they're singing different hymns? I don't know. And I do think that is, in the Fed's case, because it's such a large committee with the voter, non-voter issue. I think it is a bit of a struggle at times. But watching the Bank of England in this particular time with internal and external members, far fewer of them, they have some of the same issues or the ECB.
Beckworth: Yeah. That's a great point. We live in a day and age of increased transparency, realtime analysis, realtime news expectations are higher. Jay Powell's gone to a press conference every FOMC meeting. It's like when I was in college, I was thrilled to go in the hallway and look at the professor posting the grades. It wouldn't have your name but some ID and you'd look across your grade. To the point when I was teaching if you didn't get the test graded that day and post them online, students were irate with you. There's expectation is immediate feedback, we want to know here now. And so the same pressure is applied to the Fed.
The meetings are generally... you get the sense that people are really glad to be speaking with one another. They uniformly say how important these meetings are for their own thinking. So why is it that they're not singing from the same page in the hymn book, they're singing different hymns? I don't know. And I do think that is, in the Fed's case, because it's such a large committee with the voter, non-voter issue. I think it is a bit of a struggle at times.
Beckworth: Let me switch gears on this transparency and communication issue and talk about some of the FOMC statements that have come out that provide forward guidance. I know you have some thoughts on this, but the one statement that they issued leading up to the inflation overshoot is that they would not raise interest rates until inflation had been for some time above 2%. And some people think that may have tied their hands. This forward guidance may have been a little too much, or maybe even some of the forward guidance in the summary of economic projections. What are your thoughts on the forward guidance that comes out of the FOMC?
The Effect of the Fed’s Forward Guidance
Meade: Well, that's a really interesting question, David. I think the Fed started using forward guidance in the early 2000s. Basically Ben Bernanke was a governor when he first came to the Board and he of course had contributed heavily to the academic literature on monetary policy. And the idea was that you provide information about your expected future policy rate path, as a way of helping markets understand where you're going. Now, it's not a commitment because its conditional on how developments in the economy turn out. So it's an expected path and not a commitment. And I think sometimes markets have trouble not regarding it as a commitment, but nevertheless it's been very helpful to the Fed over time through a variety of circumstances.
Meade: And one I can point to is after the GFC, after the financial crisis, when interest rates were at zero, there was uncertainty in markets about how quickly the Fed would begin to tighten policy, would lift off from that zero bound. And once again, we had many different policymakers and some of them came from a tradition where they were much more hawkish and they thought that it was not such a great idea. And so their comments differed very much from other members and it was hard for markets to decide what's happening. And into that fog, they added interest rates, the dots, to the SEP. And the dots only go out a couple of years. They don't go out forever. But what those dots demonstrated when they first appeared in January 2012, was that the bulk of the committee saw interest rates at zero for a very long time, right?
Meade: The committee already had in its policy statement, which you referenced, a statement about how long they expected the funds rate to remain at zero. So that was also forward guidance. But I think the dots were helpful to that conversation. I think what happened in 2020, so we go into the pandemic, as you know the world changed enormously and no one's experienced economies in a pandemic. The people were looking back to the early 1900s influenza. And of course that's not a really relevant comparison in terms of the economy. It might be great for epidemiologists and public health, but not so great from an economic perspective.
Meade: And in the midst of all of this, the Fed issued its new framework, which was a flexible average inflation targeting framework and we can talk more about that. But I take your question to be more around the forward guidance that then accompanied that framework and went into the FOMC statement in September, the meeting after it issued the framework. And that guidance said that they wouldn't lift off from zero until inflation had come back to 2%. And remember the world in which that we'd been living was one where inflation had been below 2% for 10 years almost. So it wouldn't lift off from zero until inflation came back to 2% and was on track to exceed 2% modestly for some time. And we were at maximum employment. And one comment I'll make about that guidance, it was completely unconditional. So it didn't have any escape clauses in it.
Meade: The earlier experience with guidance that was based on economic conditions, which was issued initially in December, 2012, by Ben Bernanke, had an escape clause if inflation exceeded two and a half percent, but this one had no escape clause. And of course, no one thought inflation was going to go where it went. So as it turned out, they satisfied the inflation conditions in that statement before they determined that they had satisfied the maximum employment conditions. And that was affected by the fact that they thought maximum employment was going to look like the pre pandemic economy. February 2020 labor market conditions would reassert themselves and they would be at maximum employment. And now what we know is we're beyond maximum employment in the current economy, extremely tight labor market, and it doesn't look exactly like February 2020, at least in terms of labor force participation.
Meade: I think the Fed – and we have to be very clear that this is an extremely challenging time that Fed's been hit with, enormous numbers of aspects of the pandemic and its aftermath and the supply chains and the Russian invasion of Ukraine that are complicating its task – but it did misjudge the strength of the labor market starting about last summer and therefore was late to say it had satisfied the conditions and so on. That's one example from that experience.
Beckworth: Do you attribute falling behind the curve more to the framework or just the FOMC making a bad call that would've occurred in even the old framework?
Meade: I think the framework was more or less irrelevant to this.
I think the Fed – and we have to be very clear that this is an extremely challenging time that Fed's been hit with, enormous numbers of aspects of the pandemic and its aftermath and the supply chains and the Russian invasion of Ukraine that are complicating its task – but it did misjudge the strength of the labor market starting about last summer and therefore was late to say it had satisfied the conditions.
Meade: I think the new framework is very specific. It deals with what had been a trend down in the neutral interest rate over a couple of decades. The neutral interest rate is, as Janet Yellen used to say, the interest rate where keeps the economy on an even keel. And so that meant it was more likely that the Fed, when it reduced interest rates because the equilibrium interest rate was so low, would encounter the zero lower bound and then have to use other policies to stimulate the economy. And so the thinking was we really need to have inflation at our goal of 2%, because if it's running below, that's even more challenging, right, than if it's at two.
Meade: So we should be aiming effectively for maybe somewhat higher than two in times where we're in expansions so that we can offset this bias when we're at zero during recession periods. But in any event, the way they articulated it was that their goal was still 2% on the same index that they'd been looking at. But that when they had periods that inflation had been running persistently below two, they would aim to achieve inflation that averaged 2%. They would exceed two for some time by a moderate amount. I think that just became irrelevant once inflation had gone so high.
Meade: And you could then say let's revert to the old framework, which was more like flexible inflation targeting. So, I don't really see the framework as the issue. But I do see the forward guidance that they put in around the policy rate in September 2020, and also that they put in around asset purchases in December 2020, which also had conditions for stopping the asset purchases. And because of the sequencing of stopping asset purchases first, before you can lift off the interest rate, that's a process that takes time. So if you're slow to tapering the asset purchases, you're going to be slow to lift off. That just compounded to affect what happened in 2021.
Beckworth: Yeah. I agree with that entirely. I don't blame the framework. And to be fair to the Fed, I think was a very difficult time. Yes, there's elements to fighting in the last war, but this was also a one in 100 year event, a pandemic, a major, significantly large negative supply shock, which is going to push inflation up. And in real time, it really is hard to know, well, what is driving inflation up? Is it too much fiscal stimulus? Is it ongoing problems in supply chains? And in real time, it's hard to know these things. So I want to give them credit for doing that. With that said, 2021 by maybe fall, there were probably enough signs out there that suggested it was time to start tightening. But I do want to recognize it was a very difficult time. Most forecasters got inflation forecast wrong. So it was difficult. I do also want to acknowledge the challenge of forward guidance that you've stressed here and I think it's a big deal.
Beckworth: And I want to focus in on the summary of economic projections if I can for a minute. And there they give their projections and these are, as you said, conditional forecasts, these are based on what will happen given their current forecast of where the economy's going, which means it can change. It's not set in stone. And yet market participants tend to treat it as an unconditional forecast. And I'm thinking specifically of the interest rate forecast. We look at all the variables, but if you go to, for example, 2021, and you look at the interest rate forecast for the Federal Funds Rate, it's at 0% all the way out to 2023, three years. And I think the challenge is it's hard for the public or markets to understand what an unconditional forecast is. They look at that and say, "Oh, it's written in stone. This is it. We're going to have low rates for the next three years." And of course, here we are in 2022, and we're going in a very different direction than that. So, do you think it's just hard? Is it some cognitive bias in markets that makes it difficult for them to look at the SEP, look at forward guidance in general, and see it as conditional versus unconditional?
The Market’s Read on the Summary of Economic Projections
Meade: I don't know. I think that the Fed stresses this all the time, the data dependence. There's a further complication on the SEP, so the instructions to the SEP tell people to fill in the form. There are forecasts for GDP growth, unemployment, and inflation, conditioning them on their individual view of appropriate monetary policy. So not what the committee will do. You're not saying, "This is what I think the committee will do." As Marianna Kudlyak used to like to say, they're telling you to fill it in on the policy that I would do if I were the chair.
Meade: So what would really be nice would be to show everyone in real time. I don't think the Fed should do this, let me be clear, but you could really make sense of these much better if you had each individual's GDP path, unemployment path, inflation and interest rate. And then you understand how they see the economy evolving, but yet the medians are published. And before the medians were published, the staff did look at how representative is the median as an indicator of simple tendency? And it seemed like a pretty good one, but you have to remember that, first of all, their forecasts are always data dependent, right? And they are really optimal monetary policy and they aren't speaking for the committee. And I think as much as you tell people that, they then go back to taking the medians as the consensus of the committee and it's what they're going to deliver. And I think that's a problem. I'm not quite sure how to solve that problem.
Beckworth: So, do we ditch the dot plots?
Meade: One way to do it would be to take the S&P away, but I'm not sure that would be helpful.
Beckworth: Right, right. Okay, with the time we have left, I want to switch gears to the framework itself and discussions surrounding it, since you were a key part of that. And look forward to 2024, I believe when they're going to be starting the next one. So any thoughts on where this may go next time? Yes.
The Fed’s Next Framework Review
Meade: I do think that the next framework review will have to do a full postmortem of this episode. And what were the key issues that arose, perhaps misjudgments for instance on the inflation forecast, perhaps unconditional forward guidance. Governor Waller, Chris Waller, has given a speech recently where he talked about the role that the payroll's data in real time played in terms of the misjudgment of the labor market. Recalled that in 2021 the payroll's numbers were quite weak for some of the year and then a set of revisions came out later in the year that revealed that the labor market had been a lot stronger than they had realized via the payroll's numbers. Now, some people have argued that some other data indicator from say the JOLTS data, the Job Openings and Turnover Survey, well, labor market turnover, had pointed to a stronger labor market, had signaled that. But regardless they need to do I think a very thorough case study of where the errors were, why they viewed the economy as purely driven by supply shocks and didn't recognize the role that fiscal stimulus was playing to pop up demand.
Meade: So I think they need to do that. I think they need to do a thorough exploration of inflation. It's time to revisit, with the public, why it is that they have as their goal and index that people aren't familiar with. The Personal Consumption Expenditures Index may well be the right index for the Fed to target. But I do think they need to engage with the public on why it is that they don't target the CPI. Which is the index that everyone follows that affects their wage payment adjustments, and social security adjustments, and so on and explain to the public what the differences are in those measures, because right now they're running at quite considerably different rates. So I think they need to do that. As well as some discussion of the distributional effects of inflation on lower income households. There's some research on this, tend to probably face higher prices than upper income household too, for a variety of reasons and so on. So they need to focus that next review on the mistakes that were made and issues around inflation and then whether or not they use this discussion, so that in and of itself is a very, very useful exploration to do.
I do think that the next framework review will have to do a full postmortem of this episode. And what were the key issues that arose, perhaps misjudgments for instance on the inflation forecast, perhaps unconditional forward guidance...why they viewed the economy as purely driven by supply shocks and didn't recognize the role that fiscal stimulus was playing to pop up demand...As well as some discussion of the distributional effects of inflation on lower income households.
Meade: Whether they use it to adjust the framework, to make it clear what they would do outside of these periods when they're at the zero lower bounds, make the framework a little bit more applicable to all time periods, whether they want to perhaps raise the inflation goal. So let's say the framework review comes around a time where inflation has been brought down on the Feds measure to under 3%. Maybe you're at two and a half percent. And this sidesteps the question of whether we're going to have a recession or not, but maybe the Fed judges that getting inflation down that extra half percentage point would really wring a lot out of the labor market. It would take a lot of pain that they don't want to inflict on the economy. Could they embrace a target range of two to 3% with the midpoint of the target range being their neutral or raise the goal itself to two and a half percent without the target range?
Meade: I think whether they do that depends a lot on where is the Fed's credibility at that point? If it looks like they're just ducking the fact that they've made a lot of errors over the past five years, then I don't think it's so great. But if they've done a good job of bringing inflation back down and clearly articulate the rationale for why having a goal of two and a half percent is really better, and it doesn't mean that we're going to be living an eight and a half percent CPI inflation, then I think they could do it if the political forces are aligned and so on. But a lot's going to happen between now and then. So I wouldn't want to say I think that for sure that will be the outcome.
Beckworth: Okay. With that our time is up. Our guest today has been Ellen Meade. Ellen, thank you so much for coming on the show.
Meade: Thanks, David. It was great talking with you.
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