Bernanke's New Quarterly Press Conferences
The Federal Reserve announced last Thursday that Chairman Ben Bernanke will hold four press conferences per year beginning on April 27 of this year. The press conferences will be held at the conclusion of designated rate-setting meetings, and they will be used to explain the Fed's reasoning behind its policy choices. As the Fed explains, the press conferences will be used "to present the Federal Open Market Committee's current economic projections and to provide additional context for the FOMC's policy decisions."
The decision to hold press conferences continues a series of steps the Fed has taken over the last several decades toward more openness.
For most of its history, the Federal Reserve was extremely secretive. It made no attempt to signal its policy decisions in advance, in fact it went out if its way to hide this information, and it did not announce policy decisions after they were made.
The Fed's initial move toward openness came in the 1975. The Fed had taken considerable and justifiable criticism over its response to the oil price shocks and other problems of the early 1970s that caused inflation to increase to levels far beyond what was tolerable at the time. In response, Congress asserted its oversight responsibility and authority by requiring the Chair of the Fed to present testimony before Congress twice each year explaining its monetary policy decisions. It was a reminder to the Fed â€" a reminder with more bark than bite â€" that the degree of independence the Fed enjoys is congressionally mandated. What Congress grants, Congress can also take away.
Since then, the Fed has continued its movement toward openness on a voluntary basis. For example, it began announcing changes in its policy stance in 1994, and explicit federal funds rate targets in 1995, and the Fed today is far removed from the secretive body that existed before 1975. However, unlike the change in 1975 that was mandated by Congress, these changes were motivated mainly by theoretical models in monetary economics that showed that the more information people have about the intentions of policymakers, the better the policy outcome.
However, this is not the entire story nor the main motivation for making this particular move at this time. The Fed has lost credibility with the public during the crisis. It is worried about further loss of credibility and -- particularly if inflation becomes a problem -- further loss of its independence and authority.
As the economy begins to recover, the Fed must get policy just right. If if it raises interest rates too soon it will slow the recovery of output and labor markets, and if it waits too long to tighten the result will be inflation. In addition, if inflation breaks out before the economy has fully recovered, the Fed will have to decide whether to fight inflation even though unemployment is still relatively high. Either way it decides, it will face criticism over the move.
The Fed understands these dangers, and its decision to hold press conferences is an attempt to provide additional clarity on policy and thereby protect itself from further damage.
It's possible that the press conferences will result in more confusion than clarity, but on the whole I think this is a good idea. Members of the Federal Reserve give many speeches in public, often followed questions, and I think most people would agree this has added to our general understanding of the thinking behind Federal Reserve policy decisions. This is one more chance to explain the Fed's thinking, and the press conferences are specifically directed at communicating on behalf of the Fed's policymaking committee. Thus, the press conferences ought to provide additional insight into the FOMC's decisions.
