A commitment to even greater transparency appears to be the Federal Reserve’s New Year’s resolution. While the release of quantifiable objectives is of interest, attaining the ideal balance remains a formidable task.
Gone are the days of speculating the direction of Fed policy merely by the size of Alan Greenspan’s briefcase. The Federal Reserve has adopted a New Year’s resolution to become increasingly transparent in sharing their policies and methodologies in 2012. Currently the committee releases their traditional statement, which is later accompanied by detailed meeting minutes, an analysis of individual member expectations and even press briefings. It is widely expected that the Fed will soon add specific, quantifiable measurements to assess their long-standing dual mandate to contain inflation and unemployment.
Once the targets are shared, Fed watchers will eagerly anticipate the release of relevant economic data to shape their forecast of future policy. However, an interesting dynamic may unfold. Poor economic data may be met with optimism that the Fed will intervene. Alternatively, as data approaches the targeted levels legitimate concerns could arise as to the economy’s sustainability sans Fed involvement.
A Goldilocks scenario suggests the Fed is omnipotent, able to masterfully adjust inflation and unemployment until the balance is “just right.” The prudent investor must recognize the two variables may not converge at an ideal pace. A close eye must be kept on inflationary pressures, the often-dismissed “fly in the ointment” that may curtail the Fed’s accommodative policy well before unemployment abates.