By Michael Derby at The Wall Street Journal
Paul Volcker, the man who broke the back of inflation in the opening years of the 1980s, is a man at odds with what Federal Reserve policy making has become.
A 2% inflation target? Long-term, detailed forecasts of activity? Pledges to keep rates very low well into the future? For Mr. Volcker, who led the Fed from 1979 to 1987, these are all overly precise policy choices that promise more than any central bank can deliver. What’s worse, the policies that have come to define modern Fed policy can even be counterproductive, making central bank goals harder to achieve.
Mr. Volcker, 87, weighed in on monetary policy while participating at a conference held at the Federal Reserve Bank of Philadelphia on Thursday. The former central banker occupies a hallowed place in the institution’s history, having helmed the effort that decisively killed the high inflation that boiled out of the 1970s, albeit by way of creating a sharp economic downturn. His blunt-force approach to central bank policy making stands in sharp relief to the increasingly complex web of communications and tools that have come to define the Ben Bernanke and Janet Yellen eras of central bank leadership.
Mr. Volcker, who believes the Fed’s main goal is to defend the dollar’s stability, said he doesn’t even understand why the Fed adopted a 2% target for inflation. He asked, “Do we want prices to double every generation?”
Mr. Volcker said that “any price index is an approximation of reality,” and it would be better if the Fed was “fuzzy” about what level of prices it wished to achieve. What’s more important, he said, is that “you want a situation where people generally expect prices will be stable,” and the Fed appears to have that right now.
That means that in any given month, small gains, or even modest declines, aren’t that big a deal as long as they’re weighed against the general trend. But with the current inflation target, “you have a feeling now that we are committing suicide” if any inflation gauge turns negative, however briefly, Mr. Volcker said.
Mr. Volcker also said the Fed’s decision to provide long-term forecasts for key economic variables is simply folly.
“The fate of the Federal Reserve can’t depend on the accuracy of the forecasts it makes two years ahead,” he said. Offering up forecasts with greater frequency and details–the Fed now does this on a quarterly basis–simply demonstrates to the public “more frequently the forecasts aren’t that accurate.”
Fed guidance that has at points pointed to calendar-date expectations of rate increases, as well as official guidance that rates will stay very low for a long time to come, are ultimately unproductive, he said. “If you make it precise in terms of interest rates, then the market begins working against you,” and any disconnect between what the Fed promised and what it’s delivering can cause market trouble, he said.
Mr. Volcker also said that officials, other than the Fed leader, are talking too much these days and making it harder for the central bank leader to deliver a coherent message about the policy outlook.
It seems like “it’s kind of reaching a peak” for officials speaking out, Mr. Volcker said. He zeroed in on the rising tide of officials’ dissenting votes at Fed meetings in recent years.
“You can dissent if you feel strongly enough,” Mr. Volcker said. “But unless you are willing to do that with some restraint you probably shouldn’t be in the Federal Reserve.”