Fed communication

Wednesday was something of a trifecta for Fed watchers: Chair Yellen, Board Vice-Chair Stanley Fischer, and Federal Reserve Bank of New York president Bill Dudley (who is also the vice chair of the Federal Open Market Committee) all made public appearances. Moreover, the comments by all three members of the Fed’s leadership explicitly or implicitly supported the idea that a December rate increase by the FOMC is a distinct possibility. (The possibility of a rate increase is even more distinct with this morning’s strong job market report.)

The relative unanimity of views expressed on Wednesday was unusual. As many as nineteen Fed officials—the seven Board members (when all seats are filled) and twelve Reserve Bank presidents—comment regularly on the economy and monetary policy, and their messages can vary widely. The diversity of voices has engendered frequent complaints about cacophony from market participants and the markets-oriented media. Many ask, can’t Chair Yellen do a better job of herding her cats?

The complaint is understandable, but it reflects an incomplete understanding of both the communications process at the Fed and of the purposes of the Fed’s public commentary. Regarding process: Board members and Reserve Bank presidents are not the chair’s subordinates. Rather, they are, to a substantial extent, independent policymakers. (Board members are individually appointed by the president and confirmed by the Senate. The Board as a whole must approve the selection of Reserve Bank presidents, but those decisions are not based on policy positions.) The chair consequently has little or no ability to orchestrate what FOMC participants say, even if she were inclined to do so. When I was chair, I sometimes got advance copies of participants’ speeches as a courtesy; but my approval was not necessary or expected. What you hear from the Fed is policymakers’ unfiltered, unorchestrated opinions!

Is there a case, then, to change the institutional structure of the Fed to limit public pronouncements on monetary policy? I don’t think so. The diversity of opinion coming from the Fed serves some important purposes, over and above communication to markets:

1. FOMC participants typically get only a few minutes to express their policy views in the meetings themselves. Public speeches are a forum for elaborating and providing evidence for their positions. Think of policymakers’ speeches as a continuation of the FOMC debate in other venues.
2. Importantly, the open airing of policymakers’ opinions and analysis actively engages the public in debates about critical issues. For example, a key question for the FOMC is whether significant slack remains in the labor market. Airing this issue has invited people outside the Fed to think and write about the question, and in fact there has been a lively debate about it in academia, the media, and the blogosphere. Fed policymakers are certainly aware of and not infrequently influenced by outside analysts.
3. For democratic legitimacy and accountability, the Fed needs to be transparent about how it makes monetary policy decisions. Commentary by FOMC participants allows the public to see the policy discussion in action and to better understand the relevant issues. It should also be reassuring to those who disagree with Fed decisions to know that, more often than not, their point of view is being represented in the Fed’s internal debates.

What then about the market participant who just wants to know the policy bottom line? Who should he or she listen to? There are two conduits for the FOMC’s collective decisions: its post-meeting statement and the chair’s commentary on behalf of the Committee (notably, in the post-meeting press conferences and in Congressional testimony). For those with limited time for Fed-watching, those official channels provide the best information about what the Committee is thinking and how it is likely to act.

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