Much has been made by Federal Reserve Chair Janet Yellen and her predecessor Ben Bernanke about making the central bank’s actions more open and transparent. A variety of steps have been taken toward this end, but they mainly consist of greater disclosure of Fed officials’ thinking on monetary policy and interest rates.
As far as the actual business of conducting policy goes, however, the Fed still has a long way to go.
Crafting a Narrative
About every month, the Fed holds a committee meeting known as the Federal Reserve Open Market Committee (FOMC). This is the forum where Federal Reserve board members and regional bank presidents exchange their views on where the economy is headed and what type of monetary policy is therefore most appropriate.
The Fed’s ability to forecast accurately is at the heart of its job as the unofficial “fourth branch” of the U.S. government. (Bear in mind that the Federal Reserve system is actually a private enterprise, although it basically functions as a federal institution.) Because the impact of moving the benchmark interest rate (the federal funds rate) generally takes time to be sussed out, the Fed must be forward-looking. When its projections are far off the mark, it’s the equivalent of the ground moving beneath the feet of traders and investors while they try to walk.
The issue surrounding transparency and the Fed is not about its forecasts, however. Fed officials have become much more open about their policy expectations—in some circumstances, the amount of information they share is overwhelming and often contradictory.
So the Fedheads fill the airwaves with a cacophony of noise in an attempt to appear “transparent.” Yet it’s obvious that the central bank tightly controls its messaging, between the technical language of members’ prepared remarks to the delayed release of the FOMC meeting minutes. A clear distinction ought to be made between “transparency” and merely manufacturing a narrative.
On top of this bit of media subterfuge, there is a bigger problem: Fed officials have (with some regularity) engaged in activity that is hardly “above board” when it comes to institutional transparency!
First, there was the recent revelation that Richmond Fed President Jeffrey Lacker confirmed (supposedly unintentionally) some insider rumors regarding the central bank’s intentions to an investment “research” firm in 2012. The firm, Medley Global Advisors, used this advance information to net millions in profitable trades. Although he maintains that he somewhat unwittingly was a party to the leak (he merely confirmed information rather than provided it), Lacker still decided to resign this month amid the controversy.
Then there was last week’s report that the Fed’s Vice Chair, Stanley Fischer, gave a behind-closed-doors speech at the think tank Brookings Institute for which no transcript was made publicly available. This not only gives the appearance of impropriety but is a glaring departure from protocol: virtually every thought uttered by a Fed official is recorded. Moreover, the policy-minded attendees of the speech are perfectly positioned to benefit from any non-public information that Fischer may or may not have provided.
Especially given these findings, one would hope that Yellen and company make a serious attempt to uphold the Fed’s commitment to transparency going forward—particularly in the fraught political environment of the Trump era.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.