What the Fed Should Say This Month

Information received since the Federal Open Market Committee met in December confirms that economic activity is expanding at a moderate pace. Inflation has continued to run below the Committee’s longer-run objective, primarily reflecting declines in energy prices. The decline in energy prices appears to be principally a consequence of improving technology in oil and natural gas production and is, thus, a change in relative prices that has no long-term implications for the aggregate rate of inflation.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. To support continued progress toward these goals, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.

To minimize uncertainty over the course of policy, the Committee judges that the process of normalizing interest rates should begin in June. However, the exact timing is data dependent and might be adjusted as necessary.

The Committee also judges that it is now appropriate to begin the process of normalizing its open market portfolio. Effective immediately, the Federal Reserve will cease to reinvest interest on the portfolio and maturing principal.

This statement does away with statement bloat—the profusion of meaningless sentences and phrases that have made the FOMC statement increasingly long, obscure and difficult to interpret over the past few years. Every word in the statement ought to convey useful information to the markets.

A number of FOMC members have suggested that midyear will be the appropriate time to begin to raise policy rates. The FOMC itself has been vague. No member of the leadership team, which I would define as Janet Yellen, Chairman, Stanley Fischer, Vice Chairman, and William Dudley, President Federal Reserve Bank of New York, has ruled out the midyear timing. In general, it is not good practice to announce a future date for a policy change but such an approach makes sense now given that policy rates have been near zero since December 2008. Announcing a June date will not be a shock to the market; market commentary widely suggests that June is the time the FOMC will act.

By beginning the process of letting the portfolio run off, the FOMC will dispose of that issue. If the portfolio is left to a future decision, the matter will become entangled with signals about future interest-rate policy. Dealing with the problem of defining the appropriate course of policy rates and helping to set corresponding market expectations on that course will be difficult. The FOMC does not need to complicate interest-rate policy with implicit announcements—possibly intended, possibly not—flowing from decisions on the portfolio.

The FOMC is unlikely to face more benign circumstances for dealing with its policy challenges than it faces today. The U.S. economy is growing in a balanced fashion. Inflation is below target but will rise once oil prices stop falling. Bond rates are lower than they were a year ago. The FOMC should act in a preemptive fashion, leading the markets rather than being led by them.

FOMC patience on policy is indecision, not patience, on leadership. What is the Committee waiting for?