If households and businesses believe that the Fed has run out of tools to provide monetary policy accommodation or is unwilling to use certain tools for that purpose, the risk of inflation expectations becoming unanchored to the downside would increase, which would make it even more difficult for the central bank to achieve its goals. For these reasons, LSAPs should be viewed as a viable tool in our arsenal to be used when the zero lower bound is a relevant policy concern. In terms of calibration, if LSAPs are not as powerful as some of the event studies imply, the answer is not to simply discard the tool, but instead to look for ways to enhance its efficacy and use it more aggressively. In this respect, I believe that LSAPs work best when they are openended. In such circumstances, the use of the tool is likely to be helpful in reducing tail risks and making the bad states of the world less likely rather than signaling to market participants a significant deterioration in the Federal Reserve’s outlook. LSAPs may also be a useful means of making forward guidance more credible.
The Committee as a whole needs to explain its view of where the economy is heading. The Inflation Report has been the main vehicle for expressing the collective view of the Committee. Together with the minutes of the monthly meetings, it provides an explanation of past actions which should enable others to understand how we are likely to behave in the future. At the same time, the voting records of individual members of the MPC are in the public domain. That disclosure improves the quality of decisions, as well as the accountability of Committee members, because there is no better incentive to cast one’s vote for the policy most likely to hit the inflation target than the prospect of having to defend that voting record in public. Of course, all members of the MPC are well aware that there is no certainty about the precise level of interest rates which is desirable in any given month. That is why we discuss with each other at great length the appropriate course of action before each member makes up his or her own mind. For such a system to work it is crucial that MPC members give their best judgment and do not try to reach an artificial consensus. How, then, should we balance the need to give a clear view about how the Committee sees economic developments and the requirement of individual accountability? There have been two main criticisms of the MPC in this respect. First, that the MPC has been too open about differences within it.