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Interview with Julia Coronado

Julia Coronado of Macropolicy Perspectives discussed the Monetary Policy keynote speech and policy session at the 2019 Financial Markets Conference. Paula Tkac, senior vice president and associate research director at the Atlanta Fed, conducted the interview.


Paula Tkac: Good afternoon. My name is Paula Tkac, and I'm the senior vice president and associate research director at the Federal Reserve Bank of Atlanta. We're here at the Financial Markets Conference on Amelia Island with Julia Coronado of Macropolicy Perspectives. Good afternoon, Julia.

You just moderated a great panel for us about the frontiers of monetary policy, and the first question, I thought, was just brilliant. You asked the panelists—including President Evans, Kevin Warsh, and Ethan—to talk about how they would explain the Fed's decision to pursue a large balance sheet to their moms. So talk to me about why you asked that question, and some of the responses, and how you would think about those in the context of Fed communication.

Julia Coronado: The idea of that is that Fed communication is at the heart of the current policy review. In a world where you have lots of policy tools, how do you explain those to the public? Not to the people in the room, because we're all very sophisticated, detailed monetary policy followers, but how do you explain it to your mom?

The answers were very interesting. They ranged from, "My mom just needs to know that the Fed is going to do what it needs to do to achieve its objectives of low and stable prices and maximum employment," which is fair. And another one was, "No, actually, the burden is pretty high to explain why we've shifted course from a small balance sheet to a big balance sheet"— maybe an implied little critique there that the Fed hasn't communicated that well enough. But I think it highlights the challenges that the Fed is facing when you're dealing with interest rates and balance sheet, and possibly other tools. How do you explain that to the constituents, which is the public?

Tkac: Right. For the last 10 years or so, FOMC and Fed policy has focused a lot on communication, oftentimes through explicit forward guidance. Now we're in a very distinct phase, where the committee has stated that it will be patient in assessing conditions. Some are suggesting that forward guidance maybe is not a tool for the current situation. I'm curious what your perspectives are—both from the panel today, and just in general—about the role of forward guidance in the communication toolkit, as it helps to support (or even run) monetary policy?

Coronado: We're at a moment where the Fed has backed away from forward guidance—forward guidance being a tool that was used in the crisis to help augment interest rate and balance sheet policy. What was interesting about the answers in the discussion, that I wasn't necessarily expecting, was a recognition and a discussion about how balance sheet is a form of forward guidance, how the signaling from the balance sheet is as important a channel as maybe the portfolio balance and the actual expansion of the balance sheet.

That was interesting. I think that that's something that, in this policy review, needs to be kind of wrestled with—how these things interact, what is the channel, and forward guidance and signaling appears to be a very important channel. That seemed to be a source of agreement amongst the panel participants.

Tkac: Yes. Things don't seem as simple as they did precrisis [laughter].

Coronado: Nothing simple about it!

Tkac: Another tool that we rolled out—and probably the most fun part of the discussion—was the last question, about the dot plots. So the dot plots were rolled out postcrisis as a way to be more transparent about the views of the committee. One of the folks in the audience asked a question today: "Do our panelists just wish the dot plots would go away?"

Coronado: We got the good answers on that, didn't we [laughter]?

Tkac: We did, indeed! So again, thinking about communication as a tool, are the dot plots... Have they outlived their usefulness, or is there still a role? Can actually a form of Fed communication ever really go away? Or are markets, in some sense, trained and expecting to see certain things, and so removing those pieces of communication, even if they don't work well, might actually be a problem?

Coronado: Right. I didn't get the message that they are going away imminently. The market participant on the panel, Ethan Harris, indicated that they are a useful form of communication for the markets, as imperfect as they are. We talked about possible enhancements—you know, tying the actual dots to the forecasts that accompany them. President Evans seemed open to that, so that would be an interesting evolution of the dot plot. That would help really get to the heart of the reaction function underlying each forecast, which I personally think would be useful.

So I don't think they're going away. It does seem that the mantra of transparency means you don't close things off. You figure out how to optimize and enhance those communication tools.

Tkac: Well, thanks again for moderating a fantastic panel, and joining us here at the Financial Markets Conference.

Coronado: Thank you.