Federal Open Market Committee meetings may soon get much more open.
Given the growing power of the Federal Reserve in the wake of the Great Recession, some are calling for the world’s most powerful central bank to open its doors by holding press conferences after making interest rate decisions.
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The move would mark a departure from the often-secretive ways of the Fed, but would follow in the footsteps of the European Central Bank and other monetary policy makers to strive for greater transparency. It could also cure communications problems that often ail the Fed and confuse the markets.
“We know more about CIA black ops than we do about the Fed,” said Bill Bartmann, author of Bailout Riches and CEO of Bartmann Enterprises. “There is often more confusion than clarity” on the Fed, even though it is essentially the “fourth branch of the government” and more influential to the economy than any other entity, Bartmann said.
By holding press conferences tied to its policy meetings, the Fed would be able to increase transparency, give the markets much-desired “color” on the reasons behind its actions and better communicate future moves. And given the Fed’s slow march towards more openness, press conferences could become a reality down the line.
The Federal Reserve’s communication troubles were on display in recent months as Wall Street fretted about whether or not the Ben Bernanke-led central bank would unveil new measures to breathe life into the disappointing economic recovery.
The Fed’s statement in the wake of its August meeting left some investors scratching their heads about what the policymakers’ next move would be. Ultimately, Bernanke cleared things up by hinting in a closely-watched speech at new stimulus to avoid deflation and boost employment.
Art Hogan, chief market strategist at Jefferies & Co., said a press conference immediately after the August meeting may have helped the Fed communicate its intentions better. “After the August meeting it was kind of a debacle. I don’t think they did a good job of messaging what their plan was,” said Hogan.
Bernanke himself acknowledged the importance of communication in a speech on Friday, saying, "Clear communication about the longer-run objectives of monetary policy is beneficial at all times but is particularly important in a time of low inflation and uncertain economic prospects such as the present."
Lifting the Veil of Secrecy
So how would it work? In theory, Bernanke and one or two other Fed officials would read a statement and take questions from reporters in a televised event following the release of the policy statement.
The officials’ comments would likely influence the markets and add color to the complicated financial jargon that is found in the policy statements. At the same time, reporters would have an opportunity to question the shadowy central bank.
A spokesman from the Fed declined to comment about the idea.
The ECB, which currently holds press conferences after its policy meetings, said it “has no particular comments on the communication policies and tools of other central banks.”
However, a spokesman pointed to a 2007 ECB working paper that concluded the press conferences, particularly the question-and-answer sessions, have been helpful to the markets and the central bank’s communications ability, especially during periods of economic uncertainty.
The events have “systematically added information” about policy and the “underlying state of the economy,” the paper said. In fact, the authors concluded market reaction to the press conferences were “substantially larger” than the reaction to the policy decision itself.
It’s likely Wall Street would cheer the Fed adopting the ECB press conference model because “policy uncertainty creates risk and depresses asset prices,” said Cam Harvey, a finance professor at Duke University. “Markets want more transparency. They don't want to be guessing what the Fed actually meant in the policy statement.”
While it’s still a somewhat mysterious organization, the Fed has become more open over the years. Open market operations were often a surprise when they occurred under Paul Volcker, who served as Fed chief from 1979 until 1987.
Volcker’s successor, Alan Greenspan, announced plans early in his tenure to make the Fed more transparent, but still often spoke in riddles. Bernanke, who took over for Greenspan in 2006, has taken it to new levels, doing a rare “60 Minutes” interview on CBS (NYSE:CBS) in 2009 and even holding town hall meetings.
“The drift towards more openness has been uneven but it has been inevitable,” said Vincent Reinhart, a scholar at the American Enterprise Institute and a former senior Fed official.
However, not everyone believes press conferences are the answer.
Some worry that markets could tumble if the Fed chairman stumbles or misspeaks during the press conference. Of course, by that thinking, the Fed chairman shouldn’t be allowed to speak at all.
Charlie Geisst, a finance professor at Manhattan College, said holding press conferences would take the “mystique” out of the system by divulging too much about the Fed’s plans. “Announcing monetary policy to the same people who can take advantage of it doesn’t seem to be in anyone’s best interest,” he said.
At the same time, the chairman would have to walk a tightrope because he would be speaking for a number of policymakers that often have varying views.
There are also a number of alternatives the Fed could consider to become more transparent.
Reinhart suggested the central bank release staff forecasts used in making policy decisions. He also said the Fed should consider expanding its policy statement to include more information on its economic outlook.
While he worried a press conference tied to the policy statements would be too “massaged,” Reinhart does believe there is a “pretty high” chance the Fed ultimately will hold media events, perhaps once a quarter.
“The arrow points upward. There is a trend to more openness,” said Reinhart.