Suitably Flip

Fed To Speak About Fedspeak

Fed Chairman Ben Bernanke - whose Congressional testimony this week helped convince the equity markets to bash its collective face against the wall - is going to address an audience at Cato next week to talk about the future of Fed communications.

The announcement stoked speculation that Mr. Bernanke will announce important new steps in making Fed deliberations more transparent to the public. The Wall Street Journal reported last month that Federal Reserve officials, after more than a year of study, are nearing consensus on several such steps, including the release of economic forecasts of policy makers four times a year, instead of the current two times, and lengthening the horizon for those forecasts to three years from two.

But, the Journal reported, officials are likely to defer one of Mr. Bernanke’s longstanding goals: an explicit inflation target.

Despite the way the markets always whipsaw wildly whenever a new interest rate decision is unveiled (even when those same investors see as much as 90% certainty of the outcome in advance) or the language in a policy statement is tweaked, I tend to favor moving toward a more candid, even more verbose Fed.  If they're showing their cards more often, it'll make the periodic unveiling somewhat less weighty.

There are of course risks to throwing the Temple doors wide open.  While the official meeting minutes already offer high-level disclosure, if governors felt they were unable to deliberate confidentially (and thus confidently), political considerations might constrain the scope of their discussions.  Any non-public economic data to which the committee is privy might be choked off as a valuable input to the policymaking process.  Perhaps most worryingly, if - by virtue of unbounded disclosure - the Mind of the Fed is knowable to the markets, it would enable market participants to game the policymakers, knowing how they would react to various hypothetical sets of conditions.

Bearing that in mind, though, there's likely room for selective sunshine at the Fed, which just might light the way to a future in which Fed disclosure actually contributes to - rather than interrupts - market stability.

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Fed To Speak About Fedspeak

Fed Chairman Ben Bernanke - whose Congressional testimony this week helped convince the equity markets to bash its collective face against the wall - is going to address an audience at Cato next week to talk about the future of Fed communications.

The announcement stoked speculation that Mr. Bernanke will announce important new steps in making Fed deliberations more transparent to the public. The Wall Street Journal reported last month that Federal Reserve officials, after more than a year of study, are nearing consensus on several such steps, including the release of economic forecasts of policy makers four times a year, instead of the current two times, and lengthening the horizon for those forecasts to three years from two.

But, the Journal reported, officials are likely to defer one of Mr. Bernanke’s longstanding goals: an explicit inflation target.

Despite the way the markets always whipsaw wildly whenever a new interest rate decision is unveiled (even when those same investors see as much as 90% certainty of the outcome in advance) or the language in a policy statement is tweaked, I tend to favor moving toward a more candid, even more verbose Fed.  If they're showing their cards more often, it'll make the periodic unveiling somewhat less weighty.

There are of course risks to throwing the Temple doors wide open.  While the official meeting minutes already offer high-level disclosure, if governors felt they were unable to deliberate confidentially (and thus confidently), political considerations might constrain the scope of their discussions.  Any non-public economic data to which the committee is privy might be choked off as a valuable input to the policymaking process.  Perhaps most worryingly, if - by virtue of unbounded disclosure - the Mind of the Fed is knowable to the markets, it would enable market participants to game the policymakers, knowing how they would react to various hypothetical sets of conditions.

Bearing that in mind, though, there's likely room for selective sunshine at the Fed, which just might light the way to a future in which Fed disclosure actually contributes to - rather than interrupts - market stability.