Bernanke will meet the press, a first for the Fed

McClatchy NewspapersApril 26, 2011 

WASHINGTON — In a historic break with an almost century-old tradition, Federal Reserve Chairman Ben Bernanke will hold a news conference Wednesday.

If it were most any other Washington power figure, scheduling a news conference wouldn't be big news. But in speaking to the media after a two-day closed-door meeting of the Fed's main policy-making group, Bernanke will be ushering in a new era of transparency for the central bank, which has cloaked its deliberations in secrecy since its founding in 1913.

He'll also risk sending financial markets into unintended turmoil if the news media misinterpret his remarks; Fed chairmen traditionally take great care in their public utterances to avoid such risks, but news conferences are by nature dynamic exchanges in which technical nuance can easily be lost.

Bernanke's moving to strengthen the Fed's communication at a time when the central bank remains under fire from Congress and the public over big bank bailouts. Bernanke's news conference is the first of what'll be four annual news gatherings, similar to what the European Central Bank and the Bank of England already do.

"I think it is part of a long process that the Fed has been involved in for quite some time, in becoming more transparent," said Lyle Gramley, who was a Fed governor from 1980 to 1985, when secret deliberations were the norm. "The idea that you could have improved the conduct of monetary policy by communicating with the markets was unknown. But it's a solid principle now."

Back in Gramley's day, the Fed didn't even announce changes to its benchmark bank lending rate — the federal funds rate — which banks charge each other for overnight loans. Changes in that rate influence short-term lending rates across the economy, as well as foreign exchange values, long-term borrowing costs and ultimately the amount of credit in the economy.

"The strategy then was based on the assumption that the Fed could accomplish its objectives more successfully if markets were surprised," Gramley recalled. He noted that Wall Street firms hired people to do nothing but watch what was happening on trading desks minute by minute to detect the Fed's intervention.

The Fed, an independent agency that doesn't rely on government-appropriated funds, has been something of a mystery since its founding. It faced a torrent of criticism in the 1980s from House Banking Committee Chairman Henry B. Gonzalez, D-Texas, whose tortured efforts to shed more sunlight on Fed activities set in motion the events that culminate with Wednesday's news conference.

Gonzalez fought to get records of the Fed's secret meetings made public. He eventually got the Fed to release transcripts of past meetings after a five-year lag. His efforts also led to the release of the minutes of monetary-policy meetings — such as this week's, which take place eight times a year — but only after a six-week delay, which was shortened to three weeks after 2004.

It wasn't until 1995 that the Fed began issuing statements announcing changes in monetary policy; previously it simply let markets react to its actions. And it wasn't until 2000 that a statement was issued at the close of every meeting of its rate-setting Federal Open Market Committee whether action was taken on rates or not.

"This was an improvement, but it wasn't great. That's sort of been the lay of the land from the mid-'90s to the present moment," said Walker Todd, a former researcher.

Todd, who's now at the independent American Institute for Economic Research, thinks the Fed should release transcripts of monetary policy meetings faster than it does.

"There's no objective reason that they couldn't release the full-fledged transcripts two or three weeks after the meeting," he said.

During and after the financial crisis of 2007-08, the Fed rescued gigantic insurer American International Group, helped broker the sale of investment bank Bear Stearns, lent billions of dollars in short-term loans to market participants and purchased billions more in securities and bonds to shore up the financial sector and the economy.

Most economists think those actions prevented a full-blown economic depression. But the Fed's authority to do some of what it did was murky, and that led to demands by Rep. Ron Paul, R-Texas, and Vermont independent Sen. Bernard Sanders to audit the Fed and force it into greater disclosure.

Two news organizations — Bloomberg and Fox Business — successfully sued to force the Fed to release records earlier this year of all its transactions during the financial crisis. By resisting and losing in court, the Fed dented its image. Bernanke is betting that news conferences will make the Fed appear as open as any other government institution.

Wednesday's news conference, and those that follow, will help set a precedent for a process that could get stickier in time. The Fed soon must thread a policy needle as the economy recovers and inflation pressures build. The cure for inflation is higher interest rates or tighter credit. But raising rates at a time of high unemployment will be unpopular, since higher borrowing costs slow economic activity. The Fed also is trying to wind down its purchase of at least $600 billion in government bonds amid a sluggish economic recovery.

Communicating those policy changes will present Bernanke with some public-relations challenges, probably later this year, so Wednesday is an early rollout to work out the kinks.

"When they start tightening, they will be using a novel instrument" in the news conference format. "You don't want to start (news conferences) when events are driving it. You have to establish precedent," said Vincent Reinhart, a former top economist on the Federal Open Market Committee. "What will the rules of the road be? How much follow-up will he allow? How much will he convey about the meeting? It could be 45 minutes of him rereading the (FOMC) statement. It could be very boring, or pretty interesting."

While news conferences have long been considered, Reinhart said, "the fact that they didn't do it before means there had to be some costs associated with the benefits. The costs are mostly what do you do to the social dynamic of the FOMC."

The Fed chairman is first among equals on the board of governors, and as the first speaker at monetary policy meetings, he frames the choices in play. The chairman's power will grow with his news conference visibility, while other participants aren't permitted to speak until the Monday after a FOMC meeting.

Reinhart, who's now a scholar at the American Enterprise Institute, a conservative policy-research group, is skeptical of this step's value. He thinks that publishing more staff reports and research would be a better option to communicate Fed policy objectives.

"First, the chairman is going to be risk-averse. He's not going to convey much information at the press conference itself. Those at the periphery are going to want to talk more when their time comes so they can offset the effects of the chairman getting to speak first," he said. "More than anything else, it does erode the mystique of the central bank, because now the Federal Reserve will be one more entity having a press conference."

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