At The Fed, Silence Isn't Golden Anymore

No one said glasnost would be easy for a hidebound, insular institution. Mikhail Gorbachev learned that the hard way. Federal Reserve Board Chairman Alan Greenspan and new Vice-Chairman Alan S. Blinder are taking their lumps, too, as they struggle to lead the Fed out of the financial shadows and into the light of scrutiny.

After operating for decades behind a veil of Kremlinlike secrecy, the central bank this year opened its bronze doors a crack. But the glare of openness is unnerving financial-market players used to being kept in the dark. The Fed's unprecedented announcement of a policy change in February sent Wall Street into a tizzy even though the bank raised interest rates a puny quarter of a point. In August, Blinder got his own dose of glasnost backlash when he admitted the obvious: Central banks balance inflation-fighting concerns against the impact of rate hikes on unemployment. His brief remarks unleashed a torrent of debate about the role of central banks.

HOW BLUNT? Despite the unease stirred by Greenspan's and Blinder's moves, the central bank won't return to its obscurantism. The regular announcement of interest-rate changes is now virtually standard procedure. But there's still vigorous debate within the policy-making Federal Open Market Committee about how much further to go. The Fed is announcing votes when there is unanimity, but it's afraid to disclose split decisions for fear the press will emphasize division. The FOMC is still deciding how blunt to be in explaining policy moves. And when rates went unchanged in July, the committee wouldn't announce nonaction. Dare it be bolder if it does nothing at its next meeting on Sept. 27?

The opponents of big change at the Fed cite Blinder's woes as evidence. The Vice-Chairman's candor frightened traders who view the Fed as the bulwark against inflation. An open-mouth policy, too, can turn small points into huge controversies, since the financial press is trained to find hidden meanings in cryptic Fedspeak. "More openness is a good thing, but you have to be careful you don't scare or surprise," says Darwin L. Beck, an economist at CS First Boston Corp. "Blinder got in trouble because he is suspected of being a closet inflationist."

Although Fed colleagues insist that Blinder's comments were innocuous--"The whole thing has been blown up way out of proportion," says Governor Lawrence B. Lindsey--they concede the flap reinforces their reticence about speaking out. Rather than be Blinder-sided, shrugs one Fed official, "My advice is to just shut up." But that kind of old thinking is what prompted outside critics--from Congress to Wall Street--to prod the Fed toward glasnost. The Fed is responding, but slowly and begrudgingly.

If anything, the Fed needs more prodding, such as to release FOMC meeting minutes promptly. The notes are now released five weeks later, but Wall Streeters see no reason to withhold them beyond a week. "The more information the Fed puts out and the more it explains monetary policy, the better," says Allen L. Sinai, chief economist at Lehman Brothers Global Economic Advisers Inc.

Fed officials still won't go public in a big way. Regular news conferences or appearances on the evening news shows--or C-SPAN--are out of the question for now. Still, there's no turning back from an overdue march toward greater accountability. An unrepentant Blinder seems determined to see to it. "The Fed could do a better job of explaining itself to the people," he argues. "It's their economy, not ours." Until Greenspan & Co. perfect the vocabulary of openness, however, look for more confusion in financial markets that can't read the new tea leaves.