Putting Their Mouth Where the Money Is
Sunday, August 6, 2006
Most people who follow the Federal Reserve may be fixated right now on what it will do Tuesday about interest rates.
A few, including this columnist, are already looking ahead to the October meeting.
According to a recent news release, the Oct. 24-25 confab of the Federal Open Market Committee "will be expanded to two days to allow time for discussion of communications issues."
A worthy topic -- indeed, one of the stickiest subjects Fed policymakers have wrestled with in recent years. The conversation will be the latest in a long series of meetings, speeches and working groups relating to "transparency," or the promoting of a better understanding in the securities markets, and among the general public, of what the Fed is up to.
When he took over from Alan Greenspan early this year as the Fed's chairman, Ben S. Bernanke, declared increasing transparency as one of his prime goals. In the next few months, he seemed to struggle with that mission, drawing protests that he and his colleagues were talking so much they were confusing everybody.
More recently, Bernanke's statements and those of the FOMC have drawn better reviews from the markets, including a couple of 200-point jumps in the Dow Jones industrial average in the past several weeks.
In the 21st-century "information economy," what you say about your actions and intentions may be more important than the actions and intentions themselves.
This idea is so weighty it deserves a Latin motto, and fortunately there is one available: " Scribere est agere ," or "to write is to act." Putting your plan into words isn't some ancillary, after-the-fact part of the process; it may be the most essential step of all.
But expressing things in words remains a most mysterious business. It resists all attempts at reduction to a formula. Committees seem especially baffled by it.
One way to penetrate the mists is to examine successful communication -- for instance, the FOMC's statement at the most recent of its eight yearly meetings, held June 29.
A key paragraph included the following: "The committee judges that some inflation risks remain." It said, "The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook."
To this listener's ear, that little word "any" accomplished great things. Though the meaning it conveyed might have been one of uncertainty, it left investors more comfortable than they had been previously with a sense of where the Fed stood. The stock market cast its vote by jumping 2 percent.
Critics sometimes labeled Greenspan an obscurantist bent on wrapping everything he said in a kind of rhetorical cotton batting. Perhaps, but the words always had the ring of having been chosen with care. And students of the subject say he did much to advance the cause of transparency.
"Over the past decade, the market has been able to predict FOMC policy adjustments with considerable accuracy," William Poole, president of the Federal Reserve Bank of St. Louis, said in a February speech. "That fact indicates that policy has been systematic enough, and communications effective enough, that we've made major progress" toward the goal of increased economic stability.
This may be much bigger news than whether the Fed raises its interest rate target for overnight loans between banks Tuesday to 5.5 percent from 5.25 percent or keeps it on hold. When the economic history of our time is written, how much will anyone care whether the Fed increased the rate 17 times or 18 times from the 2004 low of 1 percent?
Historians may be far more interested in how well the Fed learned to present its decisions to the markets with a minimum of shock and awe.
If real progress on transparency has occurred, as Poole says, it hasn't yet received the attention it deserves. Maybe that's because it's not easy to put into words.