The Federal Reserve just updated its policy tools. What impact could that have on inflation, interest rates and your investments.
Topics covered include:
- Why is the Federal Reserve more transparent in its communication than it used to be.
- What are the Federal Reserve’s Congressionally mandated goals.
- What are four economic developments that has caused lower inflation and motivated the Fed to adjust its strategy for achieving its goals.
- Why inflation could be higher than the Fed’s 2% target
- What might the Federal Reserve do now that it has adjusted its strategy
- What will it take for inflation to increase?
- What can individuals do financially in a low return, low yield environment
Show Notes
Current US Inflation Rates: 2009-2020—US Inflation Calculator
Fed’s Elevation of Employment Goal Reflects a Changed World by Greg Ip—The Wall Street Journal
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Transcript
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 312. It’s titled “What the Fed’s new policy means for your finances.”
Fedspeak versus Clarity
In January 2012 the U.S. Federal Reserve, the U.S. central bank, did something that it had never done before. The Federal Reserve Open Market Committee issued its first statement on longer-run goals and monetary policy strategy. That’s often referred to as a consensus statement. Now, how is that remarkable, telling people what your goals are, what is the purpose of your organization? Well, prior to that, the Federal Reserve Open Market Committee, particularly under chair Alan Greenspan, was deliberately opaque, so that financial markets wouldn’t overreact to whatever the Federal Reserve stated. This cryptic form of communication, never coming out and really saying what you’re thinking, came to be known as “Fed speak”, or “Green speak.”
In 2007 on 60 Minutes Lesley Stahl interview Alan Greenspan. Stahl mentioned how Greenspan in public was inscrutable whenever Congress asked about interest rates. He resorted to indecipherable, Delphic dialect known as Fed speak. Greenspan responded, “I would engage in some form of syntax destruction, which sounded as though I were answering the question, but in fact had not.”
We can contrast Fed speak with the Federal Reserve’s 2012 consensus statement, which read:
“The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision-making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.”
Wow. Clarity facilitates great decision-making.
Why?
I thought about that this weekend. We had some friends over at our cabin to camp in our backyard. This couple has two children—five and two. They had never been camping before. These kids are on a set schedule. They go to bed at 7:30; their rooms are dark, with blackout curtains. They play white noise. And they did on this camping trip. A blackout tent. White noise.
The youngest son, after being there for a couple of days, it became pretty clear his favorite question was “Why? Why? Why?” That’s what we want from the Federal Reserve—to explain what they’re doing, and why are they doing it. And they have done a much better job of that. How refreshing it is to have clarity around our goals, our personal goals, our family goals, business, charitable goals.
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