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Thursday, March 31, 2011

Exit Fed credibility...Enter the Midas touch???

Bernanke to brief the press
Federal Reserve to join Bank of England and European Central Bank in holding monetary policy press conferences

Author: Claire Jones

Source: Central Banking | 25 Mar 2011

Categories: Monetary Policy

Topics: Federal Reserve, Bernanke, Greenspan, monetary policy

The Fed said on Thursday that the chairman will hold the quarterly briefings "to present the Federal Open Market Committee's (FOMC) current economic projections and to provide additional context for the FOMC's policy decisions".

The central bank added: "The introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve's monetary policy communication."

The Fed has long come under fire for its opacity. Alan Greenspan, Bernanke's predecessor, was seen as particularly obfuscatory, with the man himself famously quipping: "If I turn out to be particularly clear, then you've probably misunderstood what I said." Bernanke has already been more proactive, appearing on the CBS television network's 60 Minutes show twice with mixed results.

There had been some indication that the FOMC was considering press briefings before Thursday's statement, with the January minutes stating that officials "noted the importance of fair and equal access by the public to information that could be informative about future policy decisions, and they considered approaches to address this issue".

The decision to hold the briefings comes at a time when the Fed is particularly unpopular with the American public.

Indicative of this was the decision made by the state legislature in Utah earlier this month to pass a bill that allowed gold and silver coins minted in the US to be used as legal tender. The bill, which is now awaiting the signature of the state's governor, was supported by lobby groups who believe that the central bank is eroding the value of the dollar.

"At one level, the Utah Senate's gold and silver tender law represents a curious sideshow event. But at another level, it is quite serious because it represents the American public's growing distrust and dissatisfaction with the Fed," Steve Hanke, a professor at Johns Hopkins University, told "By trotting out the Fed's favourite inflation metric – the core personal consumption expenditures, which excludes food and energy items – and stating that the Fed is keeping the inflation rate well below the upper end of the target range, chairman Bernanke has lost his credibility."

Hanke added: "No American who spends a big chunk of their budget on food and gasoline believes a word that chairman Bernanke utters. In consequence, the chairman is less popular than the taxman."

However, the briefings may not be intended to sweeten the public mood. "The exercise is more about speaking to financial markets. It's more about transparency than goodwill," Lou Crandall, the chief economist at Wrightson ICAP, a research firm, told Commentators note that at present it can be difficult to discern what the FOMC consensus view is, as those members that are furthest from it are usually the first to speak after rate votes. "The briefings will go some way to resolving one of the communication timing issues they have. The members that are least happy with the decision are the most likely to give their views before the minutes of the meeting are out."

The Bank of England's governor holds press briefings every quarter to mark the release of the Bank's Inflation Report. The meetings held around the time of the quarterly reports' release have become the focus for policy changes, with each of the expansions of the asset purchase programme taking place on these occasions. The European Central Bank (ECB) president, his deputy and, on occasion, a national central bank governor meet the press after each governing.

However, in other ways, the Fed is more transparent than both the ECB and the Bank.

It is the only one of the three to reveal how rate-setters voted straight after each meeting, with the Bank waiting three weeks until the publication of the minutes and the ECB not doing so at all. The Fed is also alone in publishing a full transcript of all its monetary policy meetings, albeit with a five-year delay.

In 2011, briefings will be held on April 27, June 22 and November 2. The briefings will be broadcast live on the Federal Reserve's website. For these meetings, the FOMC statement is expected to be released an hour and forty-five minutes earlier than for other FOMC meetings at 12:30 local time.


Anonymous said...

What are your thoughts of today's disclosure of discount window participants? Was this a good idea?

Randall Parker said...

This is an excellent question Anon. I see little good here. As I understand it, the Fed will not reveal what collateral was posted to borrow at the discount window nor will it say what assets and liabilities these banks have so that the market can ascertain a bank's solvency position. Did they borrow from liquidity needs or for solvency issues? It matters a lot. This move tells us nothing of these things. So if the Fed is trying to improve communication that is fine in my book. But what they are saying is of little value and indeed may even cause greater uncertainty. The market is now left wondering whether it is solvency or liquidity and they can't know which is which. Remember when the Fed/Treasury handed out TARP money and forced all banks to drink from that cup? They did it so no one would be able to label any bank or set of banks as different. they were all in the same boat, right (no they were not but were forced to act like it)? Now they tell you who borrowed from the discount window but they don't tell you why. OK, thanks, I guess.

EconPirateAlumnus said...

Dr. P,
The decision to release the names of the institutions which used the discount window was not the Fed's decision. It was brought about by the legal actions of Fox & Bloomberg.

Randall Parker said...

Dear EPA: That does not surprise me. Thanks for the embellishment. Look at the owners in football now negotiating with the players. Open their books...not on your life.

EconPirateAlumnus said...

I'm not sure what you were insuinuating by "embellishment" - it's common knowledge. "The disclosure, brought about by lawsuits from Bloomberg LP's Bloomberg News and News Corp.'s Fox Business Network marks the government's latest step in providing more information about the Fed's controversial rescue efforts during the crisis."

Randall Parker said...

I'm not insinuating anything. Been a long day and I picked the wrong word. I meant elaboration.