Fed Moves Toward Greater Transparency as Congress Pushes, Bernanke Pulls
Whether discussing economic challenges with soldiers in Texas or seeking disclosure of policy makers’ goal for inflation, Federal Reserve Chairman Ben S. Bernanke is moving the U.S. central bank toward openness at a faster pace than any predecessor.
That path to transparency, marked in part by unprecedented disclosures of the Fed’s emergency loans that were forced by Congress and the courts, also includes a series of less publicized changes in which Bernanke has placed his own stamp on the central bank’s operations.
Bernanke “has taken the most voluntary steps of any Fed chairman in history,” said Vincent Reinhart, chief U.S. economist at Morgan Stanley in New York and a former director of the Division of Monetary Affairs for the Fed Board of Governors. Most earlier chairmen moved toward openness in monetary policy only as a result of pressure from politicians or the Federal Open Market Committee, he said.
The FOMC, which meets today in Washington, now publishes policy makers’ forecasts four times a year, up from two during the era of former Fed Chairman Alan Greenspan. The committee last month released new data that reveals its changing views about risk and uncertainty. The release came after Bloomberg News reported that, in the absence of supporting details, some traders said the Fed’s September policy statement citing “significant downside risks” confused markets.
This month, for the first time, the Federal Reserve Bank of New York made public a survey on monetary policy, financial markets and the economy conducted with the 21 government-bond firms that trade directly with the central bank.
Next month, the central bank may begin telegraphing its medium-term outlook for its main policy rate, the federal funds rate.
“Participants generally expressed interest in providing additional information to the public about the likely future path of the target federal funds rate,” minutes of the FOMC’s Nov. 1-2 meeting said.
In contrast with Greenspan, who shunned broadcast interviews during his 1987-2006 term, Bernanke appeared on CBS Corp. (CBS)’s “60 Minutes” program in 2009 and 2010. This year, he began holding quarterly news conferences, a first for a Fed chairman. Last month, he met with soldiers at Fort Bliss near El Paso, Texas, to discuss the economy, part of a series of “town hall” meetings.
“Democratic principles demand that, as an agent of the government, a central bank must be accountable in the pursuit of its mandated goals, responsive to the public and its elected representatives and transparent in its policies,” Bernanke said in May 2010.
Response to Crisis
The central bank’s response to the financial crisis of 2008 and 2009 included providing $1.2 trillion in loans to banks and other companies from an array of emergency programs and the discount window. The loans drew scrutiny from Congress, which required the Fed to reveal many of the recipients. Bloomberg LP, the parent company of Bloomberg News, sued the Fed to force the release of details related to the lending and published a series of articles about the largest borrowers this year.
Last week, in a letter posted on the central bank’s website, Bernanke said media reports about the loans contained “egregious errors.” Bloomberg stands by its reporting, Editor in Chief Matthew Winkler said last week.
Swap Recipients Unnamed
Not all the emergency lending has been revealed; as part of a currency-swap plan active from 2007 to 2010, the Fed lent dollars to other central banks, which auctioned them to local commercial banks. Almost all the end recipients of those loans, which peaked at $586 billion in December 2008, remain undisclosed. The Fed revived the swap lines this year to fight the European debt crisis. Three-month dollar loans through the European Central Bank surged to $50.7 billion last week.
The Fed’s extraordinary monetary policy, in the face of an 18-month recession and a recovery in which the unemployment rate has stayed above 8 percent, has also spurred controversy. The central bank has kept the benchmark lending rate at about zero since December 2008.
In decisions questioned by Republican congressional leaders, including Senate Minority Leader Mitch McConnell and House Speaker John Boehner, the Fed has in several steps purchased a total of $2.3 trillion in housing and government debt to try to keep longer term interest rates low.
In August, the FOMC was more precise than previously in describing its continuing commitment to monetary stimulus, pledging to keep the benchmark lending rate around zero “at least through mid-2013.”
Officials may go farther in January by releasing the interest-rate assumption that will underpin their three-year forecast, minutes from the November meeting show.
That would be tantamount to publishing a planned path for the benchmark lending rate, “the absolute ultimate in transparency,” said Laurence Meyer, a former Fed governor who is now a senior managing director at forecasting firm Macroeconomic Advisers LLC in Washington.
“Doing so would give financial markets virtually everything they need to understand about how the FOMC would respond to changes in its economic outlook,” he said.
Economists of Bernanke’s generation were steeped in the theories of Robert Lucas Jr., Finn Kydland and Edward Prescott, all Nobel Prize winners whose work underscored the importance of dealing with the public in a transparent and consistent manner.
Public Inflation Goal
As a scholar at Princeton University, Bernanke applied those lessons to monetary theory in a 1999 book he co-wrote advocating an announced inflation goal for the Fed.
“In his view communications actually help monetary policy in terms of managing market expectations,” said Mark Gertler, a New York University professor who has co-authored research with the Fed chairman.
Bernanke faces one area where Congress continues to challenge him on transparency: the Fed’s bank supervision.
So long as the largest banks still have a call on taxpayer- funded support because they’re considered too big to fail, regulators owe the public more information about their decisions, said Paul Miller, a managing director at FBR Capital Markets Corp. and a former Fed bank examiner.
“I would love for them to be more transparent” in supervision, said Miller. “As an investor, do we really know the true conditions of these institutions?”
For example, the Fed hasn’t answered all lawmakers’ questions about its role in allowing Bank of America Corp. (BAC), the second-biggest U.S. lender by assets, to transfer derivatives from its Merrill Lynch unit to a retail-banking division. The transfers, which the Charlotte, North Carolina-based bank disclosed last month, helped reduce collateral payments because the retail unit has a higher credit rating than the Merrill Lynch subsidiary.
Such transfers to deposit-taking banks have the potential to put the federal Deposit Insurance Fund on the hook for losses, so they’re closely regulated. Banks contribute to the fund, which is also backstopped by taxpayers. The Fed is the nation’s bank-holding company regulator.
Senator Sherrod Brown, an Ohio Democrat, and nine other senators asked Bernanke detailed questions about the Bank of America transaction in an October letter. The Fed chairman responded in November. He said he couldn’t answer some of the questions because they involved “confidential” supervisory information. He said after an acquisition a financial company may seek to consolidate some operations such as derivatives in the bank to “better manage and reduce the risks of the activity.”
Fed spokeswoman Michelle Smith said the central bank has taken some steps to boost transparency in supervision, noting that the Board of Governors said last month that it will disclose the results of its stress tests on the 19 largest financial institutions, such as Goldman Sachs Group Inc. (GS), Citigroup Inc., and JPMorgan Chase & Co.
“The Federal Reserve will continue to carefully consider whether additional disclosures would be beneficial,” she said. “Congress has passed laws which protect the confidentiality of some information regulators obtain from banks.”
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