The Fed's Newest Tool Is Bernanke's Voice

Next week, the Federal Reserve will do something unprecedented: it will explain what its monthly monetary policy statement actually means. Fed Chair Ben Bernanke will hold a press conference after the meeting concludes. Some think this will result in greater transparency. But the new feature will more likely simply clarify the Fed's stance, not add much additional information.

Over at Bloomberg, Joshua Zumbrun reports on how the press conferences will provide clarity:

The importance of the briefings likely will grow with time, said John Canally, an economist and investment strategist at Boston-based LPL Financial Corp., which oversees $315.6 billion in assets.

"The April 27 presser might be a trial run to work out the kinks and how he handles the questions,'' said Canally, who added that FOMC meetings with news conferences "will take on more importance," and eventually the Fed "will do what the ECB does and have one at every meeting. I also think, at the margin, it lessens the importance of the minutes and the daily and weekly parades of Fed speakers."

This last point is an important one. Investors and reporters love to discuss the minority view, because it's often more controversial, or even amusing, than the consensus. In reality, however, doing so probably exaggerates how the Fed will actually act. For example, last year just one member of the Federal Open Market Committee dissented with the majority. This year none have. Yet, the few Fed presidents that have expressed a willingness to withdraw monetary support sooner than later have received a disproportionate amount of attention. Bernanke will likely use these pressers, in part, to stress the consensus view.

These meetings will also help to correct any misinterpretation of the Fed's statement immediately. For example, in its August meeting, the Fed's action appeared to indicate that it feared a double dip. But a Fed president later clarified that this was actually purely technical, since its previous action wasn't working as anticipated. Bernanke can now provide that clarification immediately, so that the market won't be shaken by its misinterpretation.

Will the Fed provide any new information at these press conferences? That seems unlikely. For example, a reporter could ask, "So Chairman Bernanke -- what exactly do you mean by 'an extended period'? Is that through the summer, through 2011, or through 2013?" But the Fed will want to leave certain things vague. If it wanted to provide the market with greater specificity, then it would do so in its statements, minutes, or other correspondence.

These pressers will amount to another tool for the Fed. It can now better ensure that the market understands its message and reacts to what it means to say. Now if only the Fed could be sure the market will react to its precise message as it anticipates.