Commentary: Why The Fed's Open Mouth Policy Works

Not too many years ago, Federal Reserve officials conducted monetary policy as if they were members of the Politburo plotting behind the thick walls of the Kremlin. The Fed's reasoning: Secrecy was essential if central bankers were to avoid political pressure from those who would like to influence Fed policy on interest rates.

But for the past five years, Fed Chairman Alan Greenspan has been dismantling those Kremlin walls, brick by brick. On May 18, we saw the results of his efforts. Instead of waiting six weeks or more to let the markets know what it thought, the policy-setting Federal Open Market Committee broadcast the outcome of its meeting immediately: Yes, the Fed will adopt a tightening bias in light of rising inflation risks. The markets, which had reeled on news of a surprisingly high consumer price index for April, took the news in stride--relieved to see that the Fed was not yet ready to raise rates.