A See-Through Fed?

Can there be too much of a good thing?

The Fed recently announced that they will add each member’s projection of the Fed Funds rate to their biannual forecast of economic variables. The trend is for greater and greater transparency of Fed actions. I recently thought, what’s the final goal? Open meetings with streaming video and a Twitter feed?

Certainly the Fed’s approach to policy disclosure has changed. I well remember the Thursday in 1994 when they failed to inject a couple billion dollars into the economy. Interest rates jumped. There was widespread speculation that they had voted to tighten policy. (Back then there were no periodic announcements—you had to divine policy from what the New York Fed’s “money desk” did with repo transactions and T-Bill and Note purchases.)

But the next day we saw an unexpectedly weak employment report and rates fell back below where they had been the day before. A couple hours later, however, the Fed made an unprecedented, explicit announcement: they had indeed tightened policy. Their statement was designed to counter the market’s misperception. And they established a precedent: Fed policy would now be announced to the world. Since then, Fed statements have become more frequent and more explicit

But there is such a thing as too much transparency. In many spheres there are good reasons for privacy. Frank discussions of policy differences sometimes are impeded by the imminent disclosure of every detail. While no one that wants to go back to the days of gauging policy by the size of the Chairman’s briefcase, one can imagine that they might be reluctant to change course, for example, if they had previously announced their policy intentions.

Excessive disclosure could impede the Fed’s freedom to act. The current Board doesn’t seem to believe this. But the Fed is a political body, not an academic one. Free and open debate sometimes requires a little modesty.

Douglas R. Tengdin, CFA
Chief Investment Officer
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