August 2026
Mishkin, a former Fed governor, was asked what characterised Alan Greenspan's cryptic style of central banking. He grants that Greenspan was a maestro and that it may have worked for him, then makes the case that this is exactly the wrong thing to design around. The formulation is his argument for why transparency rules matter more than the quality of whoever currently holds the job.
Transcript
Let me step back a little bit and also re-emphasize some of the issues that Nicholas is talking about. There's several elements of communication, and I think that Kevin Worsch has been critical correctly of some of these elements. The other aspect of this is that I also very strongly agree that the idea of making commitments, except in extremely unusual circumstances, to the path of interest rates is a mistake. On the other hand, transparency done right is critical to successful monetary policy. And what do I mean by transparency? What's key is that the public and also the markets understand what we refer to in economics as the Federal Reserve reaction function. That how do they think that they're, how does the market understand how they're going to respond depending on the course of the economy? It turns out that if you get the markets and the public to understand your reaction function, i.e., how you'll react if inflation is higher or how you'll react if the unemployment rate goes up or so forth and so on, that actually the markets will do a lot of the work and heavy lifting for the Federal Reserve. That means that the volatility of the economy will be less because the markets basically do the heavy lifting for the Fed beforehand. And this is one of the things that, you know, it's not clear where Kevin Worsh is going to come out on this. One of the things that gives me a little hope is that he has pointed Mervyn King, as the head of the task force that's going to deal with this issue of forward guidance. And Mervyn, who is a terrific economist. I know Mervyn very well, known him for a very long time. Mervyn has come out and said, look, what we want the central banks to do is to be transparent about their reaction process reaction function because it helps actually stabilize the markets. I don't know where he's going to come out on this. What worries me a little bit is that he talks as if he wants to go back to what was true under Alan Greenspan.
For those who weren't around at that time, what characterized Alan Greenspan? I mean, like cryptic communication, sort of, just trust me, I'm the expert. I know how the Fed should react.
He was very opposed to transparency. He liked the old-style central banking. Greenspan was a master. He was a maestro. He basically felt that if he didn't have people looking over his shoulder, it was going to be easier for him and he'd do better. And in fact, in my research, particularly with Ben Bernanke, we talked a lot about why that was not a great idea. It might work under Greenspan, but you actually want to have good institutions. So good institutions actually are very important because a good institution means that bad people still don't do a terrible job and good people do an even better job. And bad institutions are ones where even good people can do bad things. This is super important now what's happening in the United States. There's an issue about how our institutions are going to evolve after the Trump presidency. It's super important in terms of economic growth. I've done a lot of research on this, that when you look at why countries are rich and other countries are poor, it's all about the institutions.
Professor Mischin, it's only been three months, but so far, it sounds like Kevin Worsch wants to go more back to the 90s or early 90s greenspan than what you and Ben Bernanke pushed the Fed to do when you were there. What do you make of what he's attempting to do by fuzzing up the framework?
Well, I think there are a lot of issues. One of the things is Kevin is one of the smartest, most capable political guys I've ever seen. He's just brilliant. He's charming. As Trump says, he's good looking. Ever hurts. I think that a lot of this is that he puts a stamp on. He'd love to be the next Allen Greens fan. He has all these task forces. I actually think the task forces are a very good idea, but it's a way of his saying, you know, I'm really taking control and I'm different and so forth. I think that the people he's appointed to these task force are really top people. So I actually think that this could be very positive. Who knows that he's very political. He's also got a huge, huge problem, which is that he's appointed by Donald Trump. And we know that if you cross Donald Trump, you were a deep doo-doo. You have a big problem.
And we also know that Donald Trump wants lower interest rates, right? And