The Federal Reserve has become a model of transparency. Not everyone likes that.
The paradox of Wednesday’s Federal Reserve release is that good economic news has actually made Janet Yellen’s job harder than ever.
Since the housing crash, the U.S. economy has steadily climbed back (if frustratingly slowly) under the central bank’s policy of ultra low interest rates. The stock market and bond markets have surged and employers are finally hiring in large numbers again.
But eventually a strong economy means rates will have to come up in order to avoid inflation. And although inflation is very low now, most observers are betting that Yellen at least wants “lift off” from today’s near-zero short rates. So now the Fed faces the tricky task of telling Wall Street and businesses how and when it will “take away the punch bowl”—that is, bring monetary policy back to normal.
So far the market has reacted positively to the Fed’s latest signal, which dropped the all-important “patience,” but tempered that move by indicating any rate increase would be slower than previously expected. That said, interest rates will have to rise sometime, and when they do, Yellen and company will have to deliver a less-friendly message.
For the people who benefit from low interest rates—and that’s quite a large group, including investors who have bet on rates staying low—such a message will be hard to hear. When Ben Bernanke signaled that he would taper off another Fed stimulus, the bond-buying program called quantitative easing, would be scaled back, the market flew into a tizzy. The “taper tantrum” caused a big spike in long-term bond rates, which meant bond holders lost money. As The New Yorker‘s John Cassidy notes, the market’s overreaction even created international turmoil when investors, believing the Fed was radically changing course (it wasn’t) pulled their money out of emerging markets.
Events like this have led commentators like Cassidy to ask whether there’s such thing as too much transparency from the Fed, especially when unpopular decisions—like rate hikes—must be made. There’s certainly precedent for this line of thought. Paul Volcker, the Federal Reserve chair who famously fought choked off inflation in the early 1980s, essentially operated in secret while putting the economy through a series of painful interest rate increases. Wouldn’t it be easier if Janet Yellen could do the same, and avoid any unnecessary confusion?
James Paulsen, chief investment strategist at Wells Capital, certainly thinks so. “I would long for those days,” he says, referring to the pre-Bernanke era of a less open central bank.
Paulsen says the Fed’s primary method of influence is making people feel confident, and transparency has undercut that mission.
“They’ve gone overboard with all this mumbo-jumbo communications that is allowing everyone to see how the sausage is made,” Paulsen explains.
Ed Yardeni, president of Yardeni research, won’t go as far as endorsing complete secrecy, but agrees the Fed’s transparency efforts have gone too far. “I think there’s got to be some happy medium between no information and too much information, and right now we’ve got too much information and too much focus on the Fed,” says Yardeni.
He’s particularly concerned with the propensity for members of the Federal Open Market Committee to undercut the Fed’s official line. That kind of uncertainty can occasionally move markets, and Yardeni specifically referenced the so-called “Bullard Bounce”; a market rally that resulted from James Bullard, President of the St. Louis Federal Reserve, telling Bloomberg Business that he supported a delay in ending the Fed’s bond buying program.
“I’d be in favor of putting a gag order on members of the FOMC,” said Yardeni.
But while some experts decry an open Fed for creating chaos, others see transparency as the only way to avoid uncertainty and turmoil during a policy shift.
“They [the Fed] don’t want to shock the market,” says James Hamilton, a professor of economics at the University of California, San Diego. “People can over-react to a change and the Fed doesn’t really want that.” He believes Bernanke’s “taper tantrum” was not the result of too much openness, but rather proves the Fed needs to indicate its intentions even farther in advance.
And while the economist acknowledges that Volcker’s lack of transparency may have been beneficial when the situation required extreme measures, he maintains current rate hikes are minor by comparison, and don’t require such a dramatic lowering of the boom.
Tim Duy, an economics professor at the University of Oregon, goes even further, arguing a more transparent Fed is better in all cases. “I am at a loss to think that the Fed would ever find itself better off being opaque,” Duy told MONEY in an email. “Volcker, in fact, may have been better able to convince the public of his intentions, and thus speed the inflation adjustment, with greater transparency.”
But if there’s one thing everyone agrees on, it’s that the Fed’s penchant for publicity provides some decent entertainment value—at least for the people who follow it for a living.
“It’s great reality television,” says Paulsen.