When the FOMC minutes were released on Wednesday (August 21st) at 2:00 PM analysts and investors combed through all ten pages looking for some hint of when QE3 might be tapered or what new trigger was be watched by the Fed. This was old news from a time capsule: The meeting was three weeks earlier and the minutes don’t mention anything that happened since the meeting. Why is old news more important than the data and market action reported since the end of July? The newer news included unemployment, inflation, industrial production, car sales and housing starts as well as a new record high and subsequent 4% drop in the stock market.
The Fed’s monetary policy tools are no longer limited to open market operations, reserve ratios or the Fed Funds rate. What they say is now as important as what they do. This shift goes back to 2003 when the FOMC began issuing statements immediately after their meetings. “Talk policy” expanded further under Ben Bernanke with press conferences and even a brief course on monetary policy and the Great Recession at the George Washington University. Gillian Tett writes in the Financial Times that other central banks are following the Fed in trying to talk the economy forward and that the development is being studied by Douglas Holmes, a professor of anthropology.
Increased communication is welcomed by most investors and analysts as greater transparency. However, we need to recognize what is happening. The central bank is not simply opening its kimono, it is using its speeches and reports in an effort to encourage us to accept its view of the economy and act accordingly. It tells us about QE3 to enhance its stimulative effects and encourage us to borrow or lend, and spend, to boost the economy. This is rhetoric, not reporting; preaching as well as publication.
All this jaw-boning should be familiar to everyone in the financial markets. Virtually every CEO and investor relations officer does this when they generously give “guidance” in forward looking statements about the next earnings report. If they do it well, investors respond by buying their stock.
It wasn’t always like this. Under Greenspan, Volcker and other Fed chairman, central bankers rarely spoke. Fed watchers – monetary theory’s version of Kremlinologists – interpreted the Fed’s open market operations for the rest of us. On rare occasions when the something needed to be said, the Fed chairman, disguised as an unnamed senior fed official, would grant an interview that always found its way to the front page of the Wall Street Journal.