At the Fed, 'cryptic' is out and transparency is in
Chairman Ben Bernanke on Wednesday outlined steps to improve the central bank's communications with Wall Street and Main Street.
"Pssst! Did you hear the Federal Reserve is going to…."
That type of communication is on the way out. Instead, America's central bank plans to become more talkative and more transparent in its efforts to inform Wall Street and Main Street how it views the economy.
Starting next year, the Fed's new communication efforts will include an economic forecast issued four times a year instead of twice, more detail in the forecasts, and identification of risks the US economy faces. Improved communications have long been a goal of Ben Bernanke, who became Fed chairman in February 2006.
"The changes will provide a more timely insight into the [Fed's] outlook, will help households and businesses better understand and anticipate how our policy decisions respond to incoming information, and will enhance our accountability for the decisions we make," Mr. Bernanke said Wednesday.
The changes will keep the markets from being shocked by shifts in Fed policy, say economists. They may also enable economists to fine-tune their own forecasts, helping to improve long-range planning by businesses.
"This is probably more important for Wall Street than Main Street," says Joel Naroff of Naroff Economic Advisors in Holland, Pa. "But it also says to Main Street, 'We are not out on some other planet.' "
The Fed's changes will bring the central bank more in line with similar institutions in Europe. The chairman of the European Central Bank, Jean-Claude Trichet, routinely holds a press conference after ECB meetings. The Bank of England issues an inflation report. "By comparison, the Fed says very little and is cryptic," says Robert Brusca of Fact and Opinion Economics in New York.
Take, for example, the Fed's approach to inflation. While most people measure inflation by how much more or less they pay for goods and services, the Fed has long viewed it in terms of the rise and fall of prices without counting energy or food. This is called the "core" inflation rate. Bernanke says the Fed now will also forecast the overall inflation rate, including food and energy.
With this change, the Fed "recognizes that people do eat and do drive cars and these things matter," says Mr. Naroff.
Economists seem pleased with Bernanke's changes, saying they permit better understanding of central bankers' terminology. "They have been using terms such as 'moderate' or 'slow' or 'robust' that have different meanings to everyone," Naroff says. "Now we'll see the terminology used four times a year, and we'll have a better idea of what kind of numbers those words translate into."
More forecasts is a good idea, adds Mr. Brusca. "As things change in the economy, we will have a better idea of how the Fed will change," he says. It's doubtful, though, that the Fed's tightly constructed statements will ever become bedtime reading. "It will still take the skills of an economist to understand them," he says.