You are here

What the Fed calls communication is really just manipulation

Section: Daily Dispatches

1:16p ET Sunday, August 13, 2006

Dear Friend of GATA and Gold:

The Associated Press story appended here says Federal Reserve Chairman Ben Bernanke "wants to improve communication" about the Fed's thinking on interest rates and the economy so investors, businesses, and consumers "may be inclined to respond the way the central bank wants them to."

But if Bernanke ever REALLY wants to communicate "what the Fed is thinking," there is a very easy way to do it: Fully open to the public the proceedings and records of the Federal Reserve.

The AP story also reports that Bernanke has already foreclosed anything close to that.

As GATA consultant Mike Bolser has often suggested, the Fed's "communications policy" may be more important than any actual intervention in the economy by the Fed, since, if "communications policy" is successful, it can induce markets to act on false pretenses and let the Fed accomplish its goals without any cost in actual policy, like raising or reducing interest rates when raising them to protect the dollar would sink the economy and reducing them to protect the economy would sink the dollar.

This stuff isn't "communication" at all. It's manipulation.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Fed Chief Wants to Improve Communication

By Jeannine Aversa
Associated Press
Sunday, August 13, 2006

WASHINGTON -- Former Federal Reserve Alan Greenspan left the door slightly ajar. His successor, Ben Bernanke, wants to open it a bit more. If investors, businesses, and consumers have a better grasp of what the Fed is thinking about interest rates and the economy, they may be inclined to respond the way the central bank wants them to. And that can help the Fed do its job: keeping the economy and inflation on an even keel.

Bernanke, who took over the Fed in February from the famously opaque Greenspan, wants to improve the Fed's communications with Wall Street and Main Street. It's not clear at this point, though, exactly how he will go about doing so.

For investors, what Bernanke and the Fed says about the economy or other things can be just as important as its interest rate decisions. Wall Street dissects every word, and the market can turn on a simple phrase.

For the Fed, getting its message across can be a challenge.

A former economics professors, Bernanke came to the Fed with a reputation for plain speaking dating to his days as an economics professor. His communications since coming to the Fed have been anything but. The result: skittish investors have sent stocks on a roller-coaster ride.

Experts say it will take time for investors to get used to Bernanke and for Bernanke to sharpen his signaling system.

In the meantime, there are steps that the Fed itself can take to be more open and understood, experts say.

"Right now there is certainly a need for improvement and room for improvement," observes Anthony Sabino, a law professor and business expert at St. John's University. "We demand transparency from private enterprise. Why does the central bank have to be so shrouded in mystery? They got to do better."

The Fed has begun a discussion of ways to improve communications. No decisions are imminent, although Fed watchers say a wide range of ideas are being explored.

A small committee is going to help the Fed "think through our entire range of communications, all aspects ... and try to develop a better, more explicit, and more useful form of communication," Bernanke told Congress last month.

Some Fed watchers suggested that the central bank issue economic forecasts quarterly, rather than the current twice a year. Others recommended including more elements in the forecasts beyond the current projections for economic growth, unemployment and core inflation.

Another suggestion: revamping the policy statements released at each of the Fed's eight scheduled meetings a year on interest rates to do a better job of explaining the Fed's actions and laying out policymakers' thoughts on economic conditions and the future course of interest rates.

On the road to clarity, Fed policymakers need to proceed with caution. Too many changes too soon can backfire and muddle the message, some warn.

"The Fed needs to go one step at a time," advises Lyle Gramley, a former Fed board member.

Some economists suggested adding more details and context to the minutes that now come out three weeks after the Fed's closed-door meetings on interest rates. Last year the Fed sped up the release of the minutes. Investors and economists applauded that move saying it provided them with more timely insights into policymakers' thoughts.

Bernanke believes the Fed's quest to be more open would be aided by numerically spelling out the acceptable bounds of inflation.

The central bank doesn't have a formal "inflation target" now, although Bernanke and other Fed members have suggested their current comfort zone is when "core" inflation -- excluding food and energy prices -- hovers in an annual range of 1 percent to 2 percent.

If investors, consumers and businesses feel confident the Fed will keep prices stable, they may be less inclined to act in ways that could aggravate inflation, may worry less that inflation will eat away at their investments and paychecks and feel better about longer-term financial planning.

Should the Fed televise its interest rate meetings?

Bernanke -- along with other economists -- don't think that's a good idea, saying it would have a stultifying effect on discussions.

"The kind of 15-second sound bite that would come of these things would just be terrible," says Anil Kashyap, professors of economics and finance at the University of Chicago's Graduate School of Business.

Even though economists say there's room for improvement, the Fed is a lot more open than it used to be. For most of its history, the Fed committee that sets interest rates had worked in secret, perpetuating the belief that operating like a Sphinx was the most effective way to carry out monetary policy.

"I beseech you to be as careful as you can," Greenspan once warned his Fed colleagues about talking about economic matters. "The press will be swarming around."

Eventually the theory took hold that clearer signals from the Fed about economic conditions and interest can help shape investor and public perception and assist the Fed in attaining its goals. A breakthrough came in 1994 when the Fed began to state when it was changing the federal funds rate, a key interest rate controlled by the central bank.

Fed policymakers also share their thoughts about the economy through speeches, testimony and other public appearances. While a cacophony of views can be confusing and roil financial markets, some diversity of opinion can be healthy.

"You don't want them to be 'yes' men," says Sabino. "You don't always have to agree with the boss."