Don't read too much into our speeches, Fed officials tell bankers
Monday 01 September 2003
In happier economic days, the Sybilline pronouncements of Alan Greenspan were hailed as the work of a master. This weekend, however, virtue became a vice, as the Federal Reserve and its chairman were forced to defend themselves against charges they had failed to make their message clear.
At the annual conference of the Kansas City Federal Reserve, held each August in the Rockie Mountain resort of Jackson Hole, Wyoming, there has been one dominant theme: a breakdown in communications between the Fed and the markets, highlighted by the confusion earlier this year over whether the central bank would buy back longer-term US Treasury paper if necessary, to counter the risk of deflation.
At one point Mr Greenspan raised the possibility of buying longer-term securities to pump money into the economy. Bond prices rose at the prospect - only to plummet when the Fed made clear in July it had no plans to do so.
In a speech to the conference, attended by central bankers and leading economists from around the world, Vincent Reinhart, head of the Fed's division of monetary affairs, advised the markets to pay less attention to statements by individual Fed policy makers, and more to the setpiece appearances on Capitol Hill by Mr Greenspan.
"The truth is that monetary policy is made by 19 people [the members of the rate-setting Federal Open Market Committee] whose views on the way the economy works span a wide band," Mr Reinhart declared. "When they speak, they speak for themselves." The solution, he added, was to make sure that central bankers and the markets listened more closely to each other and spoke more clearly - in what might be taken as a dig at the oracular style of Mr Greenspan. But how to achieve this goal was "a work in progress," he said.
On the sidelines in Jackson Hole however, various remedies were being floated. They included more setpiece speeches by Alan Greenspan, the de facto spokesman for the Fed; the introduction of explicit inflation or other targets to which interest rate policy would be linked; or the quicker release of the minutes of the policy making Federal Open Market Committee (FOMC).
Each year, the 19-member FOMC - the Fed's board plus the governors of its dozen regional banks - holds eight meetings which set short term rates. At present the minutes, detailing how decisions were reached, are made public six to eight weeks afterwards. Some suggest this gap be reduced to two or three weeks at most.
In his own remarks to the conference, Mr Greenspan ruled out declared targets, saying that monetary policymakers had to retain freedom to take in every factor influencing the economy, in the US and beyond.
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