The New Tell-All Fed by RANDALL S. KROSZNER

After the Japanese economy declined in the early 1990s and fell into deflation, the Bank of Japan dropped interest rates to nearly zero and embarked on a huge asset-purchase program (the pioneering “quantitative easing” program). The actions were on a much larger scale relative to G.D.P. than what the Fed has done. 

Japan’s central bank, however, made the mistake of emphasizing that these purchases were only temporary and would be reversed at the first signs of the proverbial “green shoots” of recovery. Despite the bank’s large-scale asset purchases, the uncertainty that these statements created undermined confidence and the willingness to borrow. The bank’s words spoke louder than actions. 

The highest priority in the economic revival plan of the newly elected prime minister, Shinzo Abe, is to strong-arm the Bank of Japan into acknowledging that it will do simply “whatever it takes” to reverse deflation there and allow a recovery to take root. 

Mark J. Carney, the head of Canada’s central bank and soon to be the governor of the Bank of England, also seems to be embracing the “whatever it takes” theory of communications: tying monetary policy to a single measure of overall economic health (like nominal income) rather than multiple metrics (inflation, inflation expectations, unemployment numbers) that may be even easier to understand. 

The Fed might well consider alternative economic indicators as it assesses whether its interventions are reducing uncertainty and promoting recovery. But the key, it seems, is to be forthcoming about its thinking with the American people. For now, the bank’s smart, calibrated open-mouth policy has been a step in the right direction.

(via Thoma)