President Barack Obama’s next choice to head the U.S. Federal Reserve could have his or her hands tied if Ben Bernanke and company continue to re-write the policymaking rule book at their current clip.
Under Chairman Bernanke, who is expected to step down when his current term expires in January 2014, the U.S. central bank has embraced the goal of making the historically shrouded business of setting monetary policy far more transparent.
It has adopted a string of new rules and guidelines to clarify its policy intentions, including an inflation target and a conditional vow to hold interest rates near zero until at least mid-2015.
The next step is being hotly debated now.
Fed policymakers are striving to agree on a set of economic variables, or thresholds — probably particular levels of unemployment and inflation — that would signal when the time to raise interest rates was finally drawing near.
The trick is making a credible commitment that convinces investors to keep longer-term borrowing costs low, thus stimulating the economy, while at the same time ensuring the Fed can react swiftly to changing economic realities.
The concern is that these rules and guidelines will crimp the central bank’s flexibility in years to come as it deals with the fits and starts of a protracted U.S. economic recovery.
“The more they do it over the next year, the more the next chair will be constrained,” said Vincent Reinhart, chief U.S. economist at Morgan Stanley and a former Fed economist. The “constructive ambiguity” the central bank has famously used over the years to safeguard its policy-setting discretion is slowly disappearing, he said.
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