Bernanke opening the door to the Fed a bit wider

January 25, 2012 - 7:15 PM

WASHINGTON (AP) — What's next — cameras in the Federal Reserve's meetings?

Don't count on it.

But it's anyone's guess how far the Fed will go in its mission to be more publicly open — beyond having the chairman hold now-quarterly news conferences and its latest gesture: forecasting where its members think interest rates are headed.

Under Ben Bernanke, the Fed has also sent more frequent clues about the economy's health. Bernanke has sat for TV interviews, too. He's held town-hall-style meetings.

It's all amounted to a radical makeover for an agency that used to rank about as high as the CIA in its mystery.

For decades, everyone pretty much agreed: The Fed had to shroud itself in secrecy to properly perform its mission — control prices and maximize employment.

The Fed chairmanship was seen as the second-most-powerful post in government after the presidency. Telegraphing decisions or opening them to public view? Not part of the job description.

"You didn't tell people anything," said David Wyss, an economist who worked at the Fed when Arthur Burns was chairman in the 1970s.

So obscure were the Fed's operations that a late-1980's book called "Secrets of the Temple" tantalized readers with the prospect of prying its door open a bit. The chairman then, Paul Volcker, wasn't operating any differently from his predecessors since the Fed's creation in 1913.

Things began to change under his successor, Alan Greenspan, who served for 18 years until 2006. Gradually, sometimes grudgingly, the Fed emerged from hiding.

The first big shift came in 1994. Greenspan's policy-setting panel issued the first-ever announcement of a change in its benchmark interest rate, called the federal funds rate.

Until then, the Fed had said nothing when it changed the funds rate. That's the rate banks charge each other for overnight loans. It's also a benchmark rate for consumer and business loans. When the Fed cuts that rate, it tries to spur borrowing and spending. When it raises it, it aims to slow growth and stem inflation.

Wall Street firms had to assign people to scrutinize the Fed's daily bond-market operations for any move in the funds rate. These Fed-watchers would make guesses based on announcements by the New York Federal Reserve Bank of how much in Treasury securities it bought or sold in a given day. (The New York Fed handles the Federal Reserve's Treasury operations.)

Transcripts show Greenspan had to twist some arms inside the Fed's policy panel to gain approval for that first announcement. Greenspan suggested it would help investors: Because five years had passed with no increase in the funds rate, he argued, a heads-up that credit was about to be tightened would prepare them.

Years later, at a conference, Greenspan explained further.

"Simply put," he said in his less-than-simple style, "financial markets work more efficiently when their participants do not have to waste effort inferring the stance of monetary policy from diffuse signals generated in the day-to-day implementation of policy."

Still, some of his colleagues clung to the Fed's secretive ways. That first statement in 1994 was opaque, even for the Fed: The central bank, it said, would "increase slightly the degree of pressure on reserve positions."

The Fed gave no target for the funds rate. Its four sentences offered scant guidance.

At first, it didn't release a statement after every meeting — only if a decision had been made to change the funds rate.

Those early statements don't much resemble those the Fed now issues after every meeting, whether or not it adjusts rates. These days, those statements update the Fed's views on the economy. And they specify its target for the funds rate.

Under Bernanke, who took over in 2006, the Fed's moves to openness have accelerated. A core goal has been to signal any imminent rate increase or decrease. For two years, the Fed said it expected to keep rates at current record lows for "an extended period." In August, it refined its horizon: It said it planned to keep rates super-low "at least through mid-2013."

On Wednesday, the Fed went further: For the first time, it signaled when committee members expect the first rate increase. The information suggested no increase is likely before late 2014 at the earliest. It also showed that 11 of 17 members see no increase until at least 2015.

Bernanke's Fed updates its forecasts for the economy four times a year, instead of twice. And it does more than toss out a statement. Bernanke now holds news conferences quarterly, each time the Fed updates its economic forecasts, as it did Wednesday.

The latest changes would have pleased and surprised the late Henry B. Gonzalez. In the early 1990s, as head of the House Banking Committee, Gonzalez sparred with the Fed over its secrecy. After years of prodding, Gonzalez scored a victory in 1995, when Greenspan's Fed agreed to start releasing transcripts of its meetings once five years have passed.

That deal marked a compromise. The Fed didn't want to release full transcripts. It preferred to stick with the heavily edited minutes that are issued three weeks after each meeting. Full transcripts, many officials felt, could dampen the free-wheeling discussions deemed essential for proper Fed decision-making.

Gonzalez had high hopes. He wanted transcripts — and videotapes — within two months of each Fed meeting. Gonzalez, who died in 2000, lost that argument.

Yet his broader mission endures. And at this point, who knows where it ends?

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EDITOR'S NOTE — Martin Crutsinger has covered the Federal Reserve for The Associated Press since 1984.