Bernanke Pursuing Anti-Greenspan Strategy: Transparency


Former Federal Reserve Board Chairman Alan Greenspan clearly reveled in his reputation as a mystical overseer of U.S. fiscal policy, an oracle whose vision and judgment rose above the banalities of common economic debate.

In hindsight, that didn’t work out so well. It turns out real estate prices wouldn’t rise forever.

The 2008 financial crisis and its extended aftermath have put a significant dent in Greenspan’s reputation, not to mention the Fed’s. Now it seems Greenspan’s successor, Ben Bernanke, is on a one-man mission to restore that reputation.

A key element of Bernanke’s strategy has been increasing transparency related to Fed policy decisions and generally seeking to demystify the once-secretive entity, essentially taking the opposite approach as Greenspan.

Bernanke’s open-door policy has picked up steam as the U.S. economy has struggled to recover from the deep recession that followed the collapse of the U.S. housing market.

“I think the secrecy of the Fed hasn’t worked, especially in this past financial market.”

- Mark Williams, former Federal Reserve Bank examiner

First it was press conferences, unprecedented for the top policy maker of the U.S. central bank. Now, in a move announced earlier this week, the Fed plans to start publishing its forecasts for interest rates, presumably in an effort to provide business owners and investors greater clarity regarding future policy decisions that may spring from the Fed.

What this means is that the Fed, beginning at its January 24/25 meeting, will release interest rate forecasts provided by Fed policy makers. In addition, the Fed will release specific predictions from policy makers as to when the Fed might start raising interest rates.

Long-time Fed watchers recall that the Fed only started announcing its interest rate changes in 1994.

“I think (the shift toward transparency) is a good thing. It should help businesses gauge their activity based on the fact that the Fed won’t surprise,” said Peter Cardillo, chief market analyst at Rockwell Global Capital. “At least they’ll try not to surprise. Anything can happen.”

The thinking goes that if employers are fairly certain that interest rates are going to remain low for the foreseeable future, that certainty might serve as a powerful incentive to take advantage of these historically-low interest rates to borrow money for expansion.

“From that perspective, it might help employers to accelerate hiring,” said Cardillo.

Cardillo said Bernanke seems willing to take unorthodox steps, including opening up the Fed to closer public scrutiny, for several reasons. First, he’s “desperately trying to get the economy growing at a more respectable level,” according to Cardillo.

Second, Bernanke wants to restore the Fed’s credibility in the wake of criticism that Fed policy makers were asleep at the wheel as the U.S. credit bubble expanded at an alarming rate a decade ago as borrowing levels rose unchecked.

Finally, Cardillo believes a bit of certainty in the U.S. could provide some much-needed counterbalance to the pervasive uncertainty overseas, primarily in Europe where the long-running debt crisis has threatened a global meltdown for over two years.

Simply put, the Fed’s rate projections are intended to allow businesses to adjust to potential shifts in interest rates well in advance of the actual change.

Interest rates were lowered to a range of 0.25% to 0% over three years ago during the worst of the financial crisis in an effort to spur lending and give a boost to the ailing U.S. economy.

Historically low interest rates weren’t enough to lift ailing housing and labor markets, however, so the Fed got creative. First by introducing massive bond buying programs that pumped more than $2 trillion in cash into the economy, and later by shifting its portfolio to include a higher percentage of long-term securities. The latter was an effort to boost the moribund housing market by driving down mortgage rates.

Neither of these purely fiscal policies has had much of an impact.

In April, Bernanke held the first press conference ever by a U.S. Fed chairman. Then in August the Fed broke from its long-standing tradition of avoiding specific timelines by announcing it would keep interest rates at their current low levels until at least mid-2013. Each of these two transparency moves was intended to open up the Fed process and reduce uncertainty.

“I think the secrecy of the Fed hasn’t worked, especially in this past financial market,” said Mark Williams, a former Federal Reserve Bank examiner and a finance lecturer at Boston University.

Williams takes a less benevolent view of Bernanke’s transparency strategy, arguing that the Fed chairman seems determined to put the Fed back in control of the fiscal steering wheel.

The Fed has been dragged “kicking and screaming” to its new policy of openness, Williams said, pushed by markets that have grown skeptical of the Fed’s ability to influence the sluggish economy.

“Over the last 3½ years the markets haven’t been pleased with how central banks have handled financial crisis,” said Williams, citing both rounds of quantitative easing, the two programs in which the Fed bought massive quantities of government bonds.

“The Fed has become reactionary,” he said. “Instead of the market reacting to the Fed, the Fed has been reacting to the market. Bernanke wants to get back in control. It’s a perception game, a PR campaign.”

By releasing interest rate projections, the Fed is trying to get out ahead of the markets, Williams explained. In any case, Williams said he generally applauds the effort.

“Markets work best when they have timely, accurate and transparent information. The Fed is coming into the 21st century kicking and screaming, but at least it’s making the attempt,” he said.