Why does the Fed talk so much?
Source: Wordsmithing Ink
Today the Fed statement will tell us that they don’t need to be patient anymore. Then Janet Yellen will give us a press conference where she’ll tell us she can be patient. We’ve gotten to the point where Fed members are telegraphing the deletion of a two-syllable adjective in their 529-word statement. What’s next: literary analysis and source-criticism? I can see it now: “Governor Brainard assented to the policy—her experience of economic stagnation in communist Poland as a young child makes her skeptical of central planning. President Evans agreed as well ….”
Ironically, we entered this era of over-disclosure through a series of market misinterpretations and Fed missteps. Back in the pre-Greenspan era, there were no Fed statements. The Fed conducted open market operations, and it was up to us to figure out what they were doing. Sometimes they added reserves, sometimes they took them away. Fed watching was a Dark Mystery, like reading tea leaves. Fed members regularly dodged questions about monetary policy.
But in February 1994 the market misinterpreted a major policy change. The Fed hadn’t tightened policy in five years, and they signaled their first rate rise. But the market got it exactly wrong—we thought they were keeping rates low. So the Fed issued a press release the next day to clarify matters. The statement was new: it laid out their policy and its justification, but it also put the Fed on a path of ever-increasing disclosures.
Federal Reserve Eccles Building. Source: Wikipedia
Twelve years later, Chairman Bernanke made a side-comment to a reporter at a dinner event that the market had misinterpreted part of his Congressional testimony. The reporter dutifully reported the scoop: “Fed Chair Corrects Market Error.” Boy, did that move things! So the new Fed Chair opened the process further. Statements became more explicit; now we have press conferences, and dot-plots. Speeches by FOMC members regularly address interest rates. And we get pre-meeting wordsmithing.
But as the editors of the Sports Illustrated February issue have learned, there can be such a thing as too much transparency. Sometimes less is more. Giving information to the market is like feeding matter into a black hole: it’s never enough. Every disclosure gives us an increased appetite. Mistakes and misinterpretations are inevitable.
Will the Fed walk this over-disclosure back? I wouldn’t bet on it. For now, it seems we’re stuck arguing over adjectives. And learning to be patient.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!