Why Do Fed Officials Talk So Much In Advance Of Action?

Tyler Durden's picture

The presidential season has started in earnest. First to hit the hustings was the president of the Federal Reserve Bank of Boston, Eric Rosengren, who, true to his blue-state roots, pressed the case for an open-ended asset purchase program. Dallas Fed President Richard Fisher made the red-state argument for easing off the monetary gas pedal. Increased chatter from Fed officials is a marker Morgan Stanley's Vince Reinhart has long-identified as signifying increased chance of Fed action. And we are hearing it. But why do Fed officials talk so much in advance of action?


Morgan Stanley: Macro Matters: The Campaign Season, Fed Style

There are two parts to the answer related to two different design flaws of the Federal Reserve. First, an FOMC meeting is a terrible venue for policy makers to exchange views. Second, even if they could talk it through, Fed officials cannot agree as a group on what they individually want.

A Failure to Communicate

The Fed’s failure to communicate internally owes to an irony of increased openness. In 1994, under considerable Congressional pressure, the Fed became more transparent. One initiative was for historians. The FOMC decided to release lightly edited, but otherwise complete, transcripts of every meeting, five years after the fact.

What followed was a predictable social dynamic that is never factored in by economists in their theoretical reasoning that more transparency is better. Starting that year, 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. If a policy issue is contentious—if it is a close call—then the volume cranks up. It just so happens that the free investing world is listening to that conversation.

A Failure to Agree

But why can’t they agree? Most applied work on monetary policy reaches the conclusion that conditional policy rules work best. That is, the policy instrument should be linked to economic performance relative to the central bank’s goal. Rather than announce a program set in amount and duration, the Fed should link changes in its balance sheet to ongoing shortfalls in achieving its dual objectives. The desire for a conditional commitment is shown in both President Rosengren’s call for an “open-ended” program and Chicago Fed President Evan’s proposal to tie action to the deviation of unemployment from its natural rate as long as inflation is contained.

Conditional commitments provide the reassurance that the central bank will keep trying until the economy performs better. If the rule is crafted correctly, it can build in an exit strategy that will be activated when data show the Fed is starting to meet its goals. At that juncture, the Fed would begin to reduce the balance sheet in a symmetric fashion to the expansion triggered by earlier shortfalls. Moreover, rule-like behavior by the Fed leads to more automatic stabilizing behavior by investors. If the economic outlook deteriorates, for example, market prices will build in the expectation of additional accommodation in advance of the official announcement to act.

Why doesn’t the Fed pin policy to some rule?

We have argued previously that most of the Fed’s problems in communications stem from three obvious, but not always well understood, principles. Those roadblocks are structural to the design of the institution.

  1. Ambiguity. The mission at the heart of Fed policymaking is ambiguous. In the Federal Reserve Act, the Congress tells the Fed to foster maximum employment and stable prices but is silent on how to weigh deviations from the two objectives or how quickly those deviations should be eliminated.
  2. Diversity. Fed officials fundamentally do not agree among themselves on how to weigh relative deviations from the two goals.
  3. Democracy. Chairman Bernanke entered office wanting to create a more democratic policymaking committee. This attitude was shaped by his own experience as a Fed governor and academic work indicating that a group makes better decisions than an individual does.

Together, these features explain why the Fed has difficulty in being specific about its policy rule. Specifying a policy rule butts against the core problem of the dual mandate. The Fed is assigned an ambiguous task (Principle 1), and its leaders do not agree on its interpretation (Principle 2). Absent the imposition of order by the chairman (in violation of Principle 3) or a change in the legislated mandate (which is not in the cards in the near future), the FOMC will not be able to pre-commit on future contingencies. As a consequence, they prefer to lay out programs in fixed amounts with set start and end dates. A fractious committee is unwilling to make conditional decisions that might depend on the interpretation of the staff or FOMC leaders later on.

Fed officials must be disappointed by an economic outlook that falls short of both of their objectives. They individually think that policy can do better, but they cannot collectively agree on how.


Source: Morgan Stanley

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EvlTheCat's picture

I don't care..... I love everyone on ZH!!!  You guys are the best...  Being drunk is fun

First post zing!!!!!!!!!

AssFire's picture

I'll drink to that!!

All the Fed talk is just to make it seem everything is not predetermined.. (but of course it is)

If it were open for true discussion anyone like a Ron Paul would not be included.

EvlTheCat's picture

Really, Tyler you have to stop posting after the Friday Funny Pages...  I can't stay sober enough to be adult  enough to comprehend the retarded central planning crap of unreality around me.

Dr. Engali's picture

Be careful drunk posting. Some of us remember everything and we know how to find old posts. You don't want to say anything you might regret later ;->

EvlTheCat's picture

:)  Dr. Engali I have burned so many bridges that it would be futile for me try to be anything but honest.  I have said it once and I will say it again, I love everyone here!!

wee-weed up's picture

Unfortunately, you must remember that butch/(i), Janet Nappy, also records everything said here.

Me? I'm an old phart, so I don't give a shit!

Yen Cross's picture

 Tall Hat/No Cattle syndrome!

Bohm Squad's picture

Funny...I was thinking all bark, no bite.

Nid's picture

On the links, one would be referred to as "All Bag".

Yen Cross's picture

 As you meet the "crew @ Denny's", after jacking your neighbor? Try trading for dummies.

Landrew's picture

It's ALL hat no cattle.

Ass to Mouth's picture

Sorry to disappoint. No QE is going to be announced at the Sept. meeting. Their chatter before the meeting is what they call their "communication tool", or, put another way, their lying or manipulation tool. They openly say that they do this if you pay any attention to the Fed governors.

High gas and food prices coupled with very low interest rates will keep the Fed from announcing anything. Bernanke has a habit of being late on everything. Six months from now, people will be still talking about whether the Fed is gonna do QE3.

EvlTheCat's picture

No shit..  Who are you disappointing?  Try to be "precognitive" at another site...

SgtShaftoe's picture

I don't think he has 6 months.  The LEIs are cyclically turning over.  Europe is probably going to be in some sort of crescendo in Sept- Oct, which will force everyone to shit or get off the pot.  It may get things moving with Japan too.  Kyle Bass et al, seemed to think that it would be a series of dominoes, but it seems to me that everyone has tied themselves together so tightly, (then put on a suicide vest), that it looks more likely to me that it could all come down almost at once.  That's just a hypothesis though.

CH1's picture

Why Do Fed Officials Talk So Much???

An old poster from the 70s comes to mind:

If you can't dazzle 'em with brilliance,

baffle 'em with bullshit!

EvlTheCat's picture

Verbal diarrhea is free!

mobtown's picture

Like any other corp. A bunch of fucwads trying to preserve their own jobs. Why? Because they can.

onelight's picture

 "It just so happens that the free investing world is listening to that conversation."

I've just assumed that when they air their differing views to the public, it is a way of giving voice to the outlook of people outside the Fed meeting rooms and processes, who can then feel their views are considered. 

An indirect way of being transparent therefore, within a process that is arguably not locked in groupthink around the table. As to whether that really amounts to independent thought, how it relates to final decision clout is a whole other issue. 

Dr. Gonzo's picture

Because Fed Presidents are basicly just Amerika's version of the Soviet Style Politburo Central Planners except the idiot citizenry think they are some kind of genius capitalists. Could you imagine a living in a nation that prized property rights, a gold redemible currency in the hands of it's people, a free press, individual and human rights, an army focused on it's defence instead of starting wars with weaker nations that would be vulnerable to exploitation, a populous you could mingle with that wasn't on foodstamps and welfare or completely ignorant, a populous that wasn't on average 100lbs overweight. a country that didn't force you to drink fluoride? God. I bet that would be a nice place to live. I'm going to dream about a nice place like this for bedtime tonight.

EvlTheCat's picture

Until they take away the second amendment, we have a nice place to live.  Dreaming is for those who have already given up on freedom.

SgtShaftoe's picture

keep stacking... and loading magazines (just in case).

Atomizer's picture



Prepared for the BIS annual research conference, Lucerne, 24-25 June 2010. .... purchase of securities by central banks will encourage the renewed issuance of financial ... public partnership with, the Federal Reserve, in the growth of the market.

>>>Click me<<< 

More double speak & fraud within the septic [government] system..

Dr. Engali's picture

" Moreover, rule-like behavior by the Fed leads to more automatic stabilizing behavior by investors"

I didn't know there were any investors left. I thought the only thing left in this market was gamblers and robots.

Jena's picture

Degenerate gamblers and robots.

Yen Cross's picture

 You made my one and only day off "Jena".  The robots and gamblers, are riding skate boards over " ShARK TANKS", as we speak.

 Wealth creation requires knowledge. See you on Sunday.

Atomizer's picture

Nice to see you chime in. Hope you’re doing well! Life is grand at my end. :>)  Watching this side show crumble has been entertaining. I had to switch my movie snack from popcorn to steak nibbles. LOL


Yen Cross's picture

 I'm perplexed Atomizer.?  I knew you were a winner from the start. What took ya so long?

  Big Foot likes " steak kibbles" , so make sure you warn the FAMILY?!

 The "DXY" is about to go parabolic in the daily chart! Short " equities".

Atomizer's picture


I miss those Kobe steaks from my travels back in my prior life.

Yen Cross's picture

 What a difference 5 years makes? It's like a blurr>>..    I think there might be a "tinge of light", going into the 2nd quarter of 2013. The sludge is hardening, but there isn't any real demand!

Atomizer's picture

My boss has told me that my time is up. I still love her.. Tomorrow is another day! Take care

disabledvet's picture

pretty bold move in my book to "take the Fed public." the ONLY right change done spot on in this catastrophe in my view. the Fed is clearly running for all intents and purposes are entire Federal Edifice. I for one am not going to complain about them speaking out! It is my personal belief that this is a VERY powerful tool in the Fed's aresenal to combat "Wall Street terror" as well. To me there is nothing to prevent the Fed from lending directly to the American citizenry if need be...and the fact that the Fed can now speak directly to us...the potential recipient of the ultimate in Federal largesse...gives them a way to directly communicate "with the targeted audience" should the catastrophe of Wall Street's "Legacy of Debt" need the MOST direct approach towards resolution (simply end the Wall Street lending cartel once and for all.) We shall see what lays in store in the months ahead. Whatever clap-trap the election winds up creating the policy response in dealing with the deficit will define the next 4 years in American politics. To me it's as simple as "getting the price of oil to 1000 bucks a barrel" and leaving it at that. I'm all ears for more...reasonable solutions of course. No, "using Eminent Domain vis a vis the hapless mortgage owner" isn't one of them. No if you're going to confront this beast you better have a plan:http://www.youtube.com/watch?v=oPOMS-YmMTc&feature=relmfu

engineertheeconomy's picture

Because they have to take a break from blowing eachother...

km4's picture

the Ben Bernank's theme song

The Pusher


Atomizer's picture



I’ll give you a bit of heads up.. 

October Insolvent Banking Piano rendition  


And the trees are stripped bare

Of all they wear

What do I care?


And Kingdoms rise

And Kingdoms? fall

But you go on... and on

vinu02's picture

Freedom of speech

http://www.freefdawatchlist.com/2012/08/weekly-summary-of-dow-jones-s-an... Disconnect continues For the week, S&P500 is up 14.88 (1.07%) and $VIX is down 7%.

pamriallc's picture

If everyone focused on remaining debt free and asset heavy, the government could go bust all it wanted to and they would have to come to the citizens for a loan. Pretty simple. American history has those examples.

q99x2's picture

FED speak is a perfect example of how they steal from the poor, from children if you like, some with disabilities, and stuff their fucking pockets with the death and disgrace of greed.

dunce's picture

All these people in high positions note that there are problems and set about to do something when most of the time the best course of action would be to contemplate their navel for a couple of weeks and then check out how that is working.

SgtShaftoe's picture

I'll tell you excactly why they talk so much: 

1)  They are in power and know it - it's intoxicating (Hubris)

2)  They have no fucking clue what they're doing "The Pretense of Knowledge" - Hayek - http://www.nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-le...


Nemesis, the greek god that punishes hubris, overconfidence and arrogance is in the neighborhood, and she's fucking pissed the fuck off!!!



joe6px's picture

Wait... It's friday and I'm just a little bit slow.  Now ZH is telling me that crony capitalism is rampant?  There was a movie a while back,' as good as it gets', as I remember.  At a desperate moment Jack says "I'm drowning and you are describing the water."

Stormdancer's picture





Morgan Stanley has one purpose for this little ditty.  To reinforce the idea that Fed Governors and Ben Bernanke actually have anything to do with setting policy.

They don't.  Never have, never will, were never intended to.  They are the dog and pony front whose sole reason for existing is give decisions made elsewhere the appearance of legitimacy.

It's all theater....






alfred b.'s picture


    It makes them sound like Mr Know-it-all:  Bullwinkle, the moose!

      ....with roughly the same IQ.



lesterbegood's picture

The Federal Corporation has been without a budget for 41 days and no one is talking about it? No budget battles in the media circus? I have only found 1 brief mention in the media regarding the unmentioned budget.

Where's the budget?

Monedas's picture

Everything they do is preceded by a 1. head fake or a 2. fake head fake !      They lie .... you decide !

spentCartridge's picture

Lotsa GLP types infecting this board as of late ...


... is it time to carsh my tomatoes?


Ponzi_Scheme's picture

Like NPR, another institution run by Jews with a few useless idiot Christians to round it out. Blacks, latinos, hindus and muslims need not apply. Let them speak separately, in public, so the sheeple can hear the names and if their public education was worth anything they might see the pattern in the matrix... Not that they will speak of it, for then they would be branded anti-Semite.

If Chinese are the top students in all schools, why do they have virtually no presence in government ?

khakuda's picture

It kills me when these bozos claim they are missing their inflation target after they keep changing the target to something that masks the inflation and idiots at Morgan Stanley fall for it. PCE? How the hell did they get away with that?

Oil, healthcare, food, rents...crap, even natural gas is inflating like crazy.