I was glad to hear Stanley Druckenmiller dismiss the relevance of Fed transparency in a CNBC interview last week. As I wrote in my last post, the hullabaloo over the Fed’s communications doesn’t rank high on my list of concerns. When I hear policymakers talk about transparency, I wonder:
- Are we actually getting a close look at their decisions, or have the important discussions migrated from transcripted meetings to other venues?
- Is the process exactly as they tell us, or is it like an investment process described in a pitchbook – mostly for marketing purposes?
- Can stated decision rules really help us predict what they’ll do next, or does the constant flow of information and new thinking render past pronouncements obsolete?
I’m reminded of the times I’ve helped to make an investment decision, communicated it immediately, and then been asked to provide a heads-up next time. (“Wait, you want me to tell you what we’re thinking before we think it?”) In other words, “transparency” sounds a bit like the many corporate buzzwords that roll off the tongue but don’t really say much. (Think, for example: “holistic,” “client-centric,” “best-of-breed.”)
In any case, my reason for this post is to share what may be the best explanation for the Fed’s surprising untaper last week. Over a year ago, I saved a Zero Hedge link featuring Vince Reinhart’s musings and inside information about the Fed. He offers a short but interesting history on the FOMC’s attempts to increase transparency, and then goes on to share some thoughts on how the decision making has evolved and why it tends to confuse us.
Here’s an excerpt (with Tyler Durden’s bolding):
Starting [in 1994], speakers at an FOMC meeting were given a rough draft of their remarks a few weeks after each meeting. Most learned, to their surprise, that they were a lot less lucid speakers than they had imagined. Off-the-cuff responses to prior speakers looked unthoughtful in black and white. Almost immediately, some began bringing prepared remarks. This set off a readiness race that ended with virtually everyone reading from prepared texts.
Meetings got longer and less spontaneous. More problematic still, meetings became a less useful way of exchanging information and changing minds. This led to a new dynamic: When policy views are scripted, the window to influence views opens before the meeting, when scripts are being written, not during the meeting, when scripts are being read. Thus, Fed officials give more speeches and interviews before meetings to signal each other what they will read at the meeting.
Reinhart then explains how these developments and other factors make it hard for the Fed to be specific. His brief 2012 article is worth a read if you missed it the first time.