<SPECIAL FEATURE>
August 17, 1999
Opening Up the Temple
by
This somewhat diminished role for the journalists is due, ironically, to the Fed's increased openness under the seemingly sphinx-like Greenspan. In early 1994, the agency started publicly announcing when the FOMC votes to change the target interest rate. Previously, investors had to watch the New York Fed's open market interventions to gauge a policy shift. Making sense of these interventions wasn't always easy. In November 1989, Wessel apparently mistook some normal seasonal adjustments to the money supply for a rate cut. "It took the Fed forever to forgive him," claims one observer.
The Fed is also much chattier than in the past. During the past two years, "there's been a Fed governor on the wires every other day" weighing in on the economy, says PIMCO's Hague. This "pattern of quotes" forms a mosaic that, in the light of macroeconomic data, reveals a good bit about the Fed's thinking. PIMCO's Hague says he pays particularly close attention when FOMC hawks (those inclined to raise interest rates at any sign of inflation) come out sounding dovish or vice versa.
In December, 1998, the Fed went even further by agreeing to immediately reveal any changes in its policy bias. At each FOMC meeting, the members indicate whether they are leaning toward raising rates, lowering rates, or remaining neutral at the next meeting. Previously, this bias was only made public after the following FOMC meeting, six to eight weeks later. So the quarter point hike in late June came with the news that the Fed had adopted a neutral bias, indicating that Greenspan & company were not necessarily going to raise rates again soon -- contrary to many predictions.
Ironically, such increased openness hasn't always clarified matters. There's been plenty of debate lately over whether FOMC officials even agree on what the neutral stance adopted in June actually meant. Indeed, stock and bond markets have swooned since Greenspan told Congress on July 22, that the Fed would "act promptly and forcefully... if new data suggest it is likely that the pace of cost and price increases will be picking up."
Yet, Greenspan added that the Fed's neutral stance meant that future moves depended on what upcoming economic data indicate about the economy and that the Fed "did not want to foster the impression that it was committed in short order to tighten further." In their articles on June 23, Wessel highlighted Greenspan's wait-and-see comments whereas Berry focused on the chairman's inflation concerns.
Because the new open door Fed extends to Greenspan's efforts to publicly communicate policy intentions to the capital markets ahead of time, Fed-watcher Jones argues that there are simply fewer meaningful Fed leaks. And the market does seem to be picking up Greenspan's signals. Bianco's research shows that the fed funds futures contract -- a market that most directly reflects traders' bets on interest rates -- had just a 50-50 chance of correctly predicting an FOMC decision during the period from 1988 to 1994. Yet, since 1994, the futures have been right about 85% of the time. "The market knows how to read Greenspan," he asserts. "That's why the business of Fed watching is in serious decline. "
Even so, G's rap for speaking in riddles if not rhyme still puts a premium on the listener's experience. "It's like looking at a series of paintings and one or two things change in each one," explains Wessel, sounding like a docent at a Monet exhibit. "Your eye is drawn to the things that change rather than to all the things that are in the background. But if you only looked at one painting, you wouldn't know what that one thing is. There's quite a bit of that in reading Greenspan's speeches."
Next -- He's Berry Good, But...