Today’s guest commentary comes from Robert Hetzel, a retired economist from the Federal Reserve Bank of Richmond. Hetzel earned his PhD from the University of Chicago, where he completed his dissertation under Milton Friedman.
He joined the research department of the Federal Reserve Bank of Richmond in 1975. As Senior Economist and Research Advisor, he advised the Bank’s president on monetary policy matters related to participation in Federal Open Market Committee (FOMC) meetings.
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Hetzel has written three books on the history of the Federal Reserve System: The Monetary Policy of the Federal Reserve: A History (2008) and The Great Recession: Market Failure or Policy Failure? (2012), both published by Cambridge University Press, and The Federal Reserve: A New History (2022), published by the University of Chicago Press.
He is also a Senior Affiliated Scholar at the Mercatus Center at George Mason University and a Fellow at the Institute for Applied Economics at Johns Hopkins University.
Robert’s commentary follows.
Image created with AI assistance and edited by Norm Dempsey
The Case for Greater FOMC Transparency
The new chair of the FOMC, Kevin Warsh, has announced committees to examine the FOMC’s procedures for making monetary policy. One way to assess their ultimate efficacy is to take the communication that now accompanies the decisions made at FOMC meetings and ask how its transparency could be improved. The question then becomes whether the committees will offer recommendations that enhance existing transparency and thus accountability.
The Statement issued following the October 28, 2026, FOMC meeting offers nothing substantive in the way of understanding how the FOMC reached its decision to leave the funds rate unchanged. When making policy in real time, reading the near-term trajectory of the economy is always challenging. The statement that the FOMC needs to accumulate more knowledge through the passage of time before making a decision on the funds rate offers little if anything to allow an assessment of the appropriate level of the funds rate. The positive comments on the strength in the economy make the Statement especially puzzling.
The September 16, 2026, FOMC meeting Statement announced that the FOMC would raise the funds rate by a quarter percentage point. It read, “Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal.” The October 28, 2026, FOMC meeting Statement announced that the FOMC would retain unchanged its target for the federal funds rate. What changed to make the FOMC unwilling to continue to deal with underlying inflation in excess of its two percent target?
The Tealbook and Monetary Policy Decisions
Policy actions depend upon forecasts of the economy, which are rendered difficult by being made in real time. A general issue is how the FOMC, with its 19 participants sitting around a table at the Board of Governors, reaches a consensus over a forecast of the economy with all its complexity. The answer offered here is that FOMC discussion possesses a common starting point, which takes the form of a Board staff forecast of the economy contained in the Tealbook. That forecast is made based on an assumed path for the funds rate. FOMC participants can then benchmark their own views relative to the Tealbook. They do so by statements that implicitly modify or sign onto the Tealbook forecast.
It would be impossible for the 19 participants individually to come up with anything approaching the enormous effort at forecasting made by the Board staff. Merely understanding FOMC decision making, not to mention assessing its advisability, requires availability of the Tealbook. Unfortunately, the current opacity of FOMC decision making is aggravated by the fact that the Tealbook forecasts are available only with a lag of five calendar years. The recommendation here is that the Tealbook forecasts be made available to the public at the start of scheduled FOMC meetings. The recommendation follows Bernanke (2025), who urged timely publication of the Tealbook.
The Tealbook provides an encyclopedic review of current data on the economy. However, determining whether the economy is evolving in a way consistent with the FOMC’s employment and inflation objectives requires confidence that the assumed funds rate path will guide the economy in a constructive way. That assurance must derive from the confidence that the staff has chosen the funds rate path in the past in a way that provides for economic stability. Basically, one is asking for a staff reaction function that explains how the funds rate path changes in response to new, incoming information on the economy. The way to look for that is to compare how the language of the Tealbook changes when the FOMC changes the direction of the funds rate.
Lessons from Past Monetary Policy
Consider the following example. After maintaining a near-zero funds rate in response to the Great Recession of 2008-2009, the FOMC began to raise the funds rate in a persistent way at the December 14, 2016, FOMC meeting. The Tealbook for the prior FOMC meeting on November 2, 2016, contained the language (October 26, 2016, “Domestic Economic Developments and Outlook,” p. 1): “Incoming data indicate that the economy is expanding at a moderate rate. Real GDP growth remains on track to pick up from its weak first-half pace, as business investment turns up and the drag from inventory investment ends. However, the projected rate of growth in the second half—at 2¼ percent—is a bit lower than in the September Tealbook, reflecting the somewhat softer-than-expected readings on consumer spending in recent months. . . . We continue to project that PCE price inflation will move up gradually to 1.9 percent in 2019.”
The succeeding Tealbook (December 7, 2016, “Domestic Economic Developments and Outlook,” p. 1) contained the language: “Real GDP growth appears to have picked up from its weak first-half pace, as the drag from inventory investment has ended and growth in private domestic final purchases (PDFP) has remained solid. . . . Meanwhile, labor market conditions have tightened further. Payrolls have continued to post solid gains, and the unemployment rate is estimated to have fallen to 4.6 percent in November. Overall, we now view the economy as operating a touch above its sustainable level. . . . With GDP growing faster than potential over most of the medium term, the output gap widens to 1½ percent at the end of 2019, an upward revision of nearly ½ percentage point relative to the October Tealbook. Correspondingly, the unemployment rate is projected to fall to 4.2 percent by 2019—about ¾ percentage point below our estimate of its natural rate.”
As a foundation for the FOMC’s move to sustained increases in the funds rate, the implicit reaction function followed the pattern pioneered by William McChesney Martin that he referred to as “lean against the wind.” With these procedures, the FOMC changes the funds rate in a measured but persistent manner to offset unsustainable strength or weakness in the economy. Within this general pattern, there are two variants. One entails a commitment to maintenance of price stability and entails preemptive changes in the funds rate to prevent the emergence of inflation. The other entails allowing inflation to emerge before significant increases in the funds rate. The latter necessarily involves an attempt to trade off between “low” unemployment and “low” inflation. The first rule is illustrated by the Volcker-Greenspan policy of restoring and then maintaining price stability and continued in the Yellen FOMC as illustrated in the above example. The second rule is illustrated by the Burns-Miller policy of the 1970s and then again with the Powell policy followed in response to the Covid epidemic. (See Hetzel 2022.)
Making the Fed More Accountable
In the spirit of accountability and transparency, how can the public monitor and assess the appropriateness of the Tealbook forecasts? Consider the inflation target. To achieve the target, monetary policy must create a rate of growth of nominal GDP equal to the rate of growth of potential real GDP plus two percentage points, the FOMC’s inflation target. The Tealbooks include the required forecasts: nominal GDP and growth in potential real output. They must be consistent with two percent inflation.
Given the importance of the Tealbook, one could ask whether the Board staff exercises an influence over monetary policy that appropriately belongs to the FOMC. The way to deal with this concern is for the FOMC to give the Board staff the reaction function that underlies the staff’s forecasts. Moreover, the Tealbook can then organize FOMC discussion in a structured way. It would also be desirable for the FOMC to make available the transcript of its meeting as soon as the participants have had a chance to vet their remarks. The transcripts would make clear that FOMC participants thoroughly assessed the recommendations for policy in the Tealbook.
At the post-meeting press conference, the FOMC chair would explain how the FOMC modified the Board staff forecasts and the funds rate path. Doing so would move questions beyond the current pattern of repeated efforts to tease out additional clues as to where the funds rate is headed. FOMC accountability would be enhanced by the resulting thorough examination by participants in financial markets as to the solidity of the foundation of the FOMC’s economic forecasts and the reaction function that shapes how those forecasts determine its behavior.
References
Bernanke, Ben. 2025. “Improving Fed Communications: A Proposal.” In Enhancing Monetary Policy Communications, session 6, Thomas Laubach Research Conference, Brookings Institution, May 16.
Hetzel, Robert L. The Federal Reserve System: A New History. University of Chicago Press, 2022.
Robert invites our audience to contact him via email with any comments: roberthetzel@comcast.net
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