Influencing Economic Expectations, Redux

Earlier this week, I posted an article (on my blog and here at Redstate ) that voiced one of my main criticisms of monetary policymakers throughout the efforts to pass the Paulson rescue package. This is not an armchair criticism; this is a complaint, based on insufficient management of a fundamental approach to monetary policy.

As I have been doing a lot of research on macroeconomic policy as of late, understanding the role of the central bank is a core component to the class that I have been reading about a lot lately. This has been especially interesting, considering the close eye that the public and the markets have kept on the Fed in recent weeks.

There are a lot of targets that central bankers must meet to achieve their ultimate objective of maintaining the value of the currency; however, if there is one single task of central bankers, it is to use monetary policy to influence expectations of economic agents (i.e., inflation, unemployment, output, GDP growth, interest rates, etc). A key measure of how effectively policymakers do this is geared around how well they communicate with consumers. If policymakers are going to influence expectations, they must be effective communicators, so that they can avoid challenges of credibility.

Bernanke is one of the best economists in the world and I think his abililty to manage the economy, especially during a time of many challenges, has been very impressive, but effective communications (to influence expectations) is one area that Bernanke and the rest of the monetary policymaking team has fallen short.

Much of the public has made this complaint, as we have heard expressed at Redstate, but until now, I have not heard much in this regard from the economics community, which surprised me. Well, apparently, I am not the only person in the world of economics with this opinion.

Greg Mankiw, my favorite economist, authored a piece on his blog expressing his concerns about Bernanke’s lack of effective communications, not only with Members of Congress, but also with the public. According to Mankiw’s search, Bernanke has not given any relevant speeches on the bailout or the financial crisis, and even his Congressional testimony was insufficient for communicating how these policies will impact the long term sustainability of our economy.

Mankiw does include an interesting reminder in his post, though, which says that Bernanke is scheduled to speak to the National Association of Business Economists (NABE), of which I am a member, next week. I am really glad he pointed this out, because I had totally forgotten about this event. I am a member of NABE and was hoping to attend the annual meeting, where Bernanke will give the keynote, but I will not be able to make it this year. Besides the fact that it is going to be a really good event, considering some of the biggest names in economics will be in attendance and there will be plenty to discuss, this event will likely serve as the first public appearance where Bernanke will address a crowd to discuss the current economic crisis.

I believe it goes without saying that the pressure is on for Bernanke, not because of the crisis, but primarily because we just haven’t heard from him, and people really need to hear substance, especially the economics community, as Mankiw points out. When the most elite economists are starting to second guess the Federal Reserve Chairman, it likely isn’t because they aren’t a good economist or don’t know how to manage the job of the chief monetary policymaker. This just boils down to inadequate communications, which in actuality, is not that difficult of a target to maintain.

What is also surprising about this is that Bernanke has traditionally been very effective at communicating with the public and the markets. In fact, he has spoken numerous times on influencing expectations, specifically in the context of inflation, but I would argue that it still applies here today.

Regardless of what happens at NABE, Bernanke will have to start meeting the expectations of economists, the markets and of course, the public, because they are listening and they really need to hear from the central bank.