The Fed's message is getting lost in translation

ANALYST'S VIEW

The Federal Reserve is working hard to communicate more frequently and clearly with the markets. Too bad, it has so little to show for its effort. That's the gist of the scuttlebutt I've been hearing in the marketplace, not to mention the complaints that land in my inbox, a sort of "general delivery'' for anyone annoyed about anything.

The thrust of the argument is that there's a qualitative difference between the statement released at the end of each Fed meeting and the minutes released three weeks later.

For example, following the December 11 meeting, the Fed released a statement highlighting the slowdown in economic growth, the deterioration in housing, some softening in business and consumer spending and increased strains in financial markets. Rising commodity prices and inflation were still a concern.

While the Fed took a pass on a formal assessment of the balance of risks, the impression was one of equal and offsetting concerns about weaker growth and higher inflation.

It was a surprise, then, to see the compendium of downbeat assessments and degree of institutional angst in the minutes, made public on January 2.

Almost everything "" housing, mortgage finance, credit conditions, bank balance sheets, consumer and business sentiment and spending "" was worse or weaker than previously expected. Exports were the only bright light.

Market expectations for more aggressive rate cuts took a giant leap forward following the release of the minutes and subsequent data showing weak manufacturing and job growth. Parsing the Statement
Even with the whining in the background, the discrepancy between statement and minutes didn't pop up on my radar screen until early this month. I make it a practice never to seek policy enlightenment in the statement, whether from conditional verb adjustment or comparative adjective assessment. (This is the result of being weaned in the pre-Glasnost era, when the Fed used "would'' and "might'' to indicate an inter-meeting bias.)

Let's face it: The statement is boilerplate that has outlived its usefulness. It reads like a template that's tweaked to accommodate the latest economic data, which means it's dated almost as soon as the ink has dried.

No one will deny that the Fed has been much more upfront about its actions in recent months than in the past, including an emergency cut in the discount rate in August and the creation of a temporary auction facility last month.

Still, many analysts aren't satisfied with either the statement or the minutes. Stephen Stanley, chief economist at RBS Greenwich Capital Markets and not one predisposed to criticize the Fed, called the communication over the last six months "manic,'' swinging from one extreme to the other.

'Mood Swing'
"The swing from a balanced risk assessment on October 31 to this gloomy set of minutes in December is another great example of the disturbing mood swings,'' Stanley said in a note on January 2.

Some of the seeming inconsistency may be a function of the different mediums. It's hard to distill the discussion from a one or two-day meeting attended by 19 policy makers and some 30 staff into a short statement that everyone can agree on.

As Fed Governor Don Kohn said in a January 5 speech in New Orleans, it can be "challenging to arrive at a clear, consistent public explanation of a policy decision'' given the diversity of views on the committee and different rationales for arriving at a decision.

Even on a stand-alone basis, the minutes are leaving some folks unsatisfied.

"It seems the Fed is making an effort to sanitize the minutes,'' Stanley said. "At the September meeting, there must have been an engaging conversation whether to do 25 or 50 (basis points), yet there's no acknowledgement of it in the minutes.''

Unsolicited Advice
To what extent the "heightened uncertainty'' (the Fed's words) is responsible for the seeming flip-flop from one meeting to the next isn't apparent. If your crystal ball is cloudy, it's hard to be clear about the message.

As to the inconsistency in the flavour of the statement and minutes, I'd like to offer chairman Ben Bernanke a few simple suggestions that would help to alleviate the confusion.

1. Get rid of the boilerplate. Say what you mean in English, not Fedspeak. If your goal is good communication with the public, write something that will look good above the fold in the New York Times. Yes, traders and investors will whine about a lack of consistency if you drop the boilerplate in favour of short, declarative sentences, but they complain no matter what. Trust me: They'll get used to it.

2. Hire a professional journalist. (I might be available, once I check with my employer on potential conflicts of interest.)

3. Figure out if less is more or more is less. If you want less, take a page out of the European Central Bank's book. The ECB's statement is minimalism at its finest: We're leaving the benchmark rate unchanged. Period. End story. If it's more you're after, see the ECB again. The bank's president, Jean-Claude Trichet, holds a press conference following regular monthly meetings and takes questions.

4. Form a committee to study the Fed's communication policy.

5. Disregard No. 4. There have been numerous committees over the years and look where we are. I know you're a consensus kind of guy, but my advice to you would be, just do it.

(The author is a Bloomberg News columnist)