The Fed’s new mandate: more thinking, less talking

On the morning of Feb. 4, 1994, the FOMCreleased a 152-word statement announcing the outcome of its semi-monthly meeting.

“Chairman Alan Greenspan announced today,” the statement began, “that the Federal Open Market Committee decided to increase slightly the degree of pressure on reserve positions.”

Here’s what it looked like in its entirety:

That was all the FOMC had to say about its first rate hike in five years.

As perfunctory as that announcement now seems — the most recent meeting produced a three-page statement, a 17-page Summary of Economic Projections, and a 44-minute press conference — it was radically loquacious for its time.

It was also historic: the FOMC had never before announced a policy change.

Until then, the market had always been left to infer the FOMC’s decisions from its actions: if the Fed’s trading desk sold Treasuries immediately after a meeting, the market knew they had decided to raise interest rates. If they bought, they had decided to lower them.

That approach seems almost unimaginable today, now that we've grown so accustomed to the FOMC intentionally moving markets with just its words. But for most of its history, the Fed governors considered their silence to be golden.

In 1975, a student at Georgetown Law sued the FOMC under the Freedom of Information Act to force the release of policy decisions immediately after the meetings. The FOMC fought the suit all the way to the Supreme Court, where it successfully argued that immediate disclosure of its decisions would increase market volatility and make it harder for the Fed to implement monetary policy.

Two decades later, Chair Greenspan remained a committed defender of Fed opacity: “To open up our debates on monetary policy fully to immediate disclosure would unsettle financial markets and constrain our discussions in a manner that would undercut our ability to function,” he warned in 1996.

In 1994, however, he wanted to make an exception. “I would very much like to have the permission of the committee to announce that we’re doing it,” he said in the meeting that decided the first rate increase in five years.

Greenspan believed the decision was significant enough to warrant public explanation: “What I’m saying is that the first time we move the funds rate after this extended period, we are hitting a ‘gong,’” he told the committee.

(Sadly lost to history is which gong he was referencing: The Gong Show on TV or Bang a Gong by T. Rex.)

It took some convincing. Some committee members worried the statement would set a precedent for regular press conferences, create demand for further disclosures, and put the Fed on a slippery slope of transparency.

But Greenspan won the day, in part by invoking the patron saint of central banking: “In 1979 there was a major change,” he reminded the committee. “Chairman Volcker and his staff went out and had a big press conference.”

Greenspan did not do anything as drastic as that (regular press conferences would have to wait for his successor, Ben Bernanke). But even just making an announcement had an element of shock and awe.

The Associated Press reported that the statement — “a rare display of openness” — had caught markets off guard. “For analysts accustomed to appraising subtle shifts in money market interest rates for clues to the Fed’s thinking, the news release was a bombshell.”

Greenspan’s purpose with the statement was to “avoid any misunderstanding of the Committee's purpose.”

Initially, it did just the opposite.

The Dow Jones News Service reported: "The Fed is evidently capable of confounding people — absolutely flummoxing them — by saying what it plans to do, then doing it, and then promptly announcing what it had done."

But the confusion proved temporary. Markets came to love the new transparency — and it really did turn out to be a slippery slope.

In February 1995, the FOMC agreed to release full transcripts of their meetings (albeit with a five-year lag).

In July 1995, the committee took the radical step of stating its decision plainly: “a decline of 25 basis points” rather than “a decrease slightly in the degree of pressure.”

In 1999, it became standard practice to announce the outcome of every meeting, even if nothing changed. 

In 2008, Ben Bernanke made post-meeting press conferences the norm.

In 2012, committee members began making their forecasts public via the dot plot.

What began as a 152-word exception had become an avalanche of communication. Every FOMC decision (or non-decision) now comes with pages of explanation, the Chair’s press conference statement, a Q&A with reporters, and a data-dump of economic forecasts. Between meetings, Fed officials add to the mountain of information with speeches and interviews.

But the trend of ever more communicating appears to have hit a high-water mark.

After last week’s FOMC meeting — the first chaired by Kevin Warsh — the statement was terse. The post-meeting press conference was deliberately uninformative. The new Chair declined to add his forecasts to the dot plot.

In other words, Warsh is taking the Fed back to the Greenspan model: lower rates (if he gets his way) and less transparency.

On the latter, at least, the message has been unduly clear.

“More thinking,” Warsh advised the Fed last year, “less talking.”

— Byron Gilliam