The Fed's new transparency: Too much information?
February 07, 2012
Following its first 2012 meeting, the Federal Reserve released a new type of report that contained details on the economic assumptions and forecasts of the Federal Open Market Committee (FOMC) members. The report was aimed at giving more transparency to an organization that hasn't always been known for sharing its reasoning with the public. With the Fed's decisions affecting everything from credit card rates to money market rates, that's a good thing, right?
But while transparency in government is usually a good thing, there are some reasons why the Fed might think twice about its new policy.
New reporting highlights
Here are some new features of the Fed report from January:
- Forecasts of variables such as GDP growth, unemployment and inflation.
- Three years worth of estimates of those factors, along with long-term forecasts.
- Information showing the range of forecasts submitted by FOMC members.
- Projections of what the fed funds rate is likely to be over the next three years, along with what the rate is expected to be for the long-term norm.
- Information on the statistical distribution of the rate forecasts submitted by FOMC members.
- A breakdown of FOMC committee members' estimates of when it will be appropriate to tighten the money supply.
In all, the report represented something of a dream for statistics junkies -- as well as a significant change from the Fed's traditional reporting style.
A departure from the past
Written reports from the Federal Reserve are available going back to 1936, when Marriner Eccles was chairman. Fed reports of that era did not contain anything like the statistical detail provided by the new reporting format, but interestingly, they did provide the identities of dissenting voters, so in this sense they were even more explicit than the new format's statistical representation of voting differences.
Eccles was succeeded by Thomas McCabe in 1948. The format of reports during his chairmanship was a little less structured than previously, and more like a running narrative of policy actions taken and the economic conditions behind them.
McCabe was followed in 1951 by William Martin, Jr., who became the longest-serving Fed chairman in history. Under Martin, the sheer volume of reporting increased considerably. Meeting reports expanded by several pages, and the Fed began to also produce detailed assessments of economic and monetary conditions. Unlike the new FOMC format though, the emphasis was squarely on depicting current conditions rather than predicting the future.
Following Martin, there was a succession of three Fed chairmen during the 1970s, but despite all the turnover, reporting practices didn't change much. It wasn't until Alan Greenspan took over in 1987 that the reporting approach changed significantly. Greenspan introduced the practice of issuing succinct, conclusion-oriented statements on Fed policy decisions. Economic details were still available in other formats, but these new statements seemed designed to communicate outcomes rather than invite analysis of the reasons behind those outcomes.
In a sense, the new statistical reports represent a return to providing detail rather than simple conclusions, but they differ from the past reports of any era in that they make predictions about the future.
The downside of transparency
The Fed's new transparency is a big change, but is it better than the approaches of the past? Here are some potentially negative consequences to the policy:
- Forecasts could turn out to be a self-fulfilling prophecy. For example, the Fed is forecasting tepid economic growth this year. Seeing that, businesses may push back expansion plans until 2013 -- and thus ensure that growth will be weak.
- The Fed may be limiting its flexibility to adapt to changing conditions. Once the Fed has made a multi-year commitment to a policy, will it feel obligated to follow through on that commitment, even if changing economic conditions indicate that a different policy would be appropriate?
- A wide split in opinions could undermine confidence in the Fed. An interest rate policy that passed by a narrow majority might be seen as being on shaky ground.
- Inaccurate forecasts could cost the Fed credibility. The Fed is publicly putting its reputation on the line with its detailed economic forecasts. A series of inaccurate forecasts could make people doubt the ability of the FOMC.
Opinions on the new reporting detail will vary, but ultimately the verdict may lay in the hands of whoever eventually succeeds Ben Bernanke as Fed chairman. Whether the next chairman continues or changes the reporting approach should speak volumes on whether the FOMC found its transparency to be worth the effort.