Federal Reserve Chairman Alan Greenspan is famous for using obscure circumlocutions that sometimes leave listeners scratching their heads. Shortly after he became chairman in 1987, he quipped, "Since becoming a central banker I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said."
But in August, even Greenspan appears to have acknowledged that the Fed may want to be a bit clearer in public statements. Fed minutes released yesterday show that Greenspan created a committee two months ago to study "whether some adjustment in its procedures would be helpful."
Greenspan's concern stems from a change in Fed policy implemented in May, when the central bank's top policymaking group, the Federal Open Market Committee, began announcing not just changes in its targets for interest rates but also which direction the rate-setting group was leaning toward regarding possible future rates.
After its May announcement that the FOMC hadn't raised rates but had adopted an "asymmetrical" stance--an indication that the next move on rates would likely be an increase--financial markets reacted as if rates had already been increased.
In a sense, the Fed's new openness had, in the mind of some officials, backfired. Part of the problem was that investors and analysts didn't fully understand what was meant by the terms "symmetry" and "asymmetry." There was widespread disagreement among FOMC members about the precise meaning of the terms as well.
Some Fed watchers, such as Goldman Sachs Group Inc. chief economist Bill Dudley, suggested the concept of symmetry was so confusing that the FOMC ought to drop the terms and simply tell the public what it wanted to convey.
The group reviewing the Fed's pronouncements is headed by Fed Vice Chairman Roger Ferguson and includes Fed board members Edward M. Gramlich, Edward W. Kelley Jr. and Laurence H. Meyer and three Federal Reserve bank presidents, Michael H. Moskow of Chicago, Robert T. Parry of San Francisco and William Poole of St. Louis. It is expected to make recommendations no later than next spring.
The new pronouncements created problems because "the sentence relating to symmetry of the [FOMC] directive was subject to differing interpretations," according to minutes of the Aug. 24 policymaking session.
FOMC members "also had expressed some discomfort with the way these announcements had been interpreted," according to the minutes. "While the committee did not contemplate retreating from its policy of immediate announcements, it might want to examine whether some adjustments in its procedures would be helpful."
In the wake of the May announcement that the FOMC was leaning toward higher rates, the committee did raise the target for the federal funds rate by a quarter of a percentage point, to 5 percent, at the June 29-30 meeting. The federal funds rate is the interest rate financial institutions charge one another on overnight loans.
At the same time, policymakers said they had moved to a symmetric, or neutral, stance regarding future rates. But the language didn't sound very neutral to many financial analysts, and some Fed officials said the neutral stance was taken to keep investors from assuming that the June rate increase was the first of several.
Then at its August session, the FOMC again raised rates by a quarter-point but kept the neutral stance. According to the minutes, committee members acted because economic growth remained so strong that there was a substantial risk that inflationary pressures would increase if rates weren't boosted.
"While key measures of prices did not at this point suggest any upturn in inflation, a failure to act would incur a substantial risk of increasing pressure on already tight labor markets and higher inflation," the minutes said. The members stuck with a symmetric stance because they believed "the committee should keep its options open with regard to the next policy move, whose direction and timing would depend on evolving economic and financial conditions."
As he also did at the June meeting, Robert D. McTeer Jr., president of the Dallas Federal Reserve Bank, dissented, arguing that gains in productivity and production capacity will continue to hold inflation down, the minutes said.
At its most recent meeting, held Tuesday, the committee left rates unchanged but moved back to an asymmetric stance, leaning toward higher rates. This time, however, the group's statement contained this added sentence: "Committee members emphasized that such a directive did not signify a commitment to near-term action."
And the reaction this time? "Taking the FOMC at its word, the market clearly expects that the funds rate will resume an upward trajectory," said F. Ward McCarthy of Stone & McCarthy Research Associates, a financial markets research firm. "Fed funds futures contracts have priced in at least one tightening by early 2000" and a second no later than April.
Was that what Greenspan and other Fed policymakers meant to convey with Tuesday's announcement? Or was their message so clear that investors misunderstood?