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Everything About FOMC Meetings Changed In 1994 When Fed Members Realized They Were Terrible Speakers
Despite its efforts to increase transparency, the Federal Reserve seems to be getting more and more complicated for outsiders especially in regards to monetary policy.
Even the statements and minutes of its Federal Open Market Committee (FOMC) meetings rarely tell the whole story of what the Fed officials are really thinking.
Indeed, to better understand the Fed, you need to follow the countless numbers of speaking engagements and interviews that the Fed members make in between the FOMC meetings.
Vincent Reinhart, Morgan Stanley’s Chief U.S. economist, explains why this is so in a new note to clients. Few people have a better understanding of how the Federal Reserve works than Reinhart, a former Fed insider.
The Fed’s failure to communicate internally owes to an irony of increased openness. In 1994, under considerable Congressional pressure, the Fed became more transparent. One initiative was for historians. The FOMC decided to release lightly edited, but otherwise complete, transcripts of every meeting, five years after the fact. 1
What followed was a predictable social dynamic that is never factored in by economists in their theoretical reasoning that more transparency is better. Starting that year, speakers at an FOMC meeting were given a rough draft of their remarks a few weeks after each meeting. Most learned, to their surprise, that they were a lot less lucid speakers than they had imagined. Off-the-cuff responses to prior speakers looked unthoughtful in black and white. Almost immediately, some began bringing prepared remarks. This set off a readiness race that ended with virtually everyone reading from prepared texts.
Meetings got longer and less spontaneous. More problematic still, meetings became a less useful way of exchanging information and changing minds. This led to a new dynamic: When policy views are scripted, the window to influence views opens before the meeting, when scripts are being written, not during the meeting, when scripts are being read. Thus, Fed officials give more speeches and interviews before meetings to signal each other what they will read at the meeting. If a policy issue is contentious—if it is a close call—then the volume cranks up. It just so happens that the free investing world is listening to that conversation.
Indeed, some weird but often humorous stuff comes up in those transcripts. In January, the Fed released the transcripts of the 2006 FOMC meetings and they were much more entertaining than you would expect.
Only Brad Pitt’s baby was bigger than the housing situation in 2006
During the September 2006 meeting Richard Fisher, president of the Dallas Fed, took to a surprising analogy when describing a market that was about to drown.
“As one CEO told me, the only subject that has been more analyzed than the housing situation is the birth of Brad Pitt’s baby. [Laughter],” the transcript says.
Richard Fisher called Bill Gross an “oddball”
This quote from the October transcript from Richard Fisher.
MR. FISHER. …The bottom line is that I think we’ve made substantial progress. But I think we have to be very mindful, Mr. Chairman, about perception if we’re to influence what really counts, which is inflationary expectations, and about whether those expectations are measured accurately by TIPS spreads, which I personally doubt. One need look no further than this morning’s Financial Times editorial or Bill Gross’s recent client letter—I’ve known Gross for twenty years, and I know he’s an oddball. Actually, I’d like that word struck from the record. [Laughter]
MR. MOSKOW. What do you want to substitute? [Laughter]
MR. FISHER. He’s increasingly addled, but his words do carry weight. In his recent client letter, he says, “Inflation is leveling off at admittedly unacceptable levels.” Hence my careful reference to the word “comportment.” I think first about the immediate statement, and I want to come to that.
Ric Mishkin wished Monetary Policy was sexier
This one comes in the October 2006 announcement, from former Fed governor Fredric Mishkin, comparing the Monetary Policy Report to dull sex.
“Another key issue is that we need to greatly improve the quality of the written documents that go with this process. The current Monetary Policy Report is really terrible. It’s dull; it’s sex made boring. I don’t want to criticize too much, but it is. [Laughter]“