The FOMC versus the Staff: Where Can Monetary Policymakers Add Value?

A key issue in monetary policymaking is the appropriate division of labor between the profes­ sional staff of the central bank and the appointed policymakers. Lars E. O. Svensson (1999) argues that the appropriate role of a policymaking group, such as the Federal Open Market Com­ mittee (FOMC) in the United States, is to make judgments about social welfare, taking as given the likely outcomes of different policies as esti­ mated by the staff. In this division, the staff is relied upon to assess current and prospective economic conditions and to forecast the effects of different policies. Policymakers’ only role is to decide which of the various options should be chosen. The obvious alternative is for policymakers to also play a role in forecasting and in predict­ ing the consequences of policy actions. In this division, policymakers supplement the staff’s analysis with their own information about likely economic developments and the effects of policy. Their choice of a particular policy then reflects their views not only of desired outcomes, but also of prospective developments and of the working of the economy. Which of these divisions of labor is best clearly cannot be determined from first princi­ ples. It depends on the relative skill of the staff and the policymakers in forecasting and under­ standing the economy. As a result, the answer may vary across times and places. In the United States, policymakers certainly appear to believe they have useful information to add to the staff’s forecasts and estimated policy The FOMC versus the Staff: Where Can Monetary Policymakers Add Value?