US Fed keeps investors in the dark

The Federal Reserve trails other central banks in openness, hamstringing it in times of market turmoil, and may not catch up even if Chairman Ben S Bernanke's campaign to improve communications succeeds.

Fed policy makers, who kept their main interest rate unchanged today, are nearing the end of more than a year of talks on how to increase transparency. The Fed is behind five of eight major counterparts, including the European Central Bank and Bank of England, according to a paper by two European economists.

The differences were stark last week, when ECB President Jean-Claude Trichet hit the airwaves and held an unscheduled press conference while colleagues spoke to newspapers amid the biggest global stock sell-off since 2003.

Bernanke was invisible, and because the Fed's top officials are so tightly scripted, any break from tradition may have panicked as many investors as it reassured. Today's statement made brief reference to heightened economic risks.

"It's one less degree of freedom,'' said Chuck Lieberman, a former New York Fed economist who's now chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey. ``The very act of providing some assurance might scare the market'' because it would be unusual, he said.

The Federal Open Market Committee, meeting in Washington today, kept its benchmark rate at 5.25 percent for the ninth straight session. In a five-paragraph statement, the Fed noted that ``downside risks to growth have increased somewhat,'' as well as reasons to continue to expect moderate growth.

While European, Japanese and U.K. central bankers hold press conferences and conduct on-the-record interviews, Bernanke's efforts are unlikely to produce that degree of transparency, Fed watchers said. America's central bank hasn't set a date for concluding the communications review.

Any changes will be ``pretty minor,'' said Adam Posen, a former Fed economist who has collaborated with Bernanke. The Fed may increase the frequency of and information contained in its economic forecasts, falling short of adopting an explicit inflation goal, economists including Posen predict.

Kansas City Fed President Thomas Hoenig said in May that ``advancing how we use the minutes'' of Fed meetings was one of the options under discussion. A conclusion is ``a ways off,'' he said May 15 in Denver.

Beginning in 1994, the Fed under former chairman Alan Greenspan started announcing rate decisions and issuing statements explaining them. That was copied by other central banks, including in Australia and New Zealand.

The Fed's counterparts have kept innovating and now the US central bank is the only one among the Group of Seven nations that doesn't hold regular press conferences. It has given no indication the practice is under consideration.

"The Fed over the last five to seven years has been moving in the right direction but still has a ways to go,'' said Tom Schlesinger, who researches the Fed as executive director of the Financial Markets Centre in Howardsville, Virginia. Openness such as the ECB showed last week would be unthinkable at the Fed, where the chairman and vice chairman tend to restrict public availability to appearances that are scheduled weeks or months in advance.

The Fed's relative lack of clarity is a challenge because, unlike the ECB, it's charged with achieving full employment as well as stable prices, said Sylvester Eijffinger, a professor at Tilburg University in the Netherlands and co-author of the study ranking central banks. It ``leads to some confusion in terms of communication,'' he said.

Transparency isn't a cure-all. Wim Duisenberg, Trichet's predecessor, was faulted for confusing markets with mixed messages on interest rates and contributing to a slump in the euro. And Bernanke himself tripped up with off-the-cuff remarks to a reporter in April last year.

Bernanke, 53, told CNBC reporter Maria Bartiromo at a Washington party markets had misinterpreted remarks to Congress that had suggested the Fed was finished raising rates.

Bonds tumbled when CNBC reported the conversation May 1, 2006. Bernanke later said the incident was a "lapse in judgment."

Public comments by top Fed officials can help soothe investors. By chance, Bernanke was scheduled to testify before Congress on February 28, a day after the biggest one-day slide in the Standard & Poor's 500 index in four years.

Bernanke said then that financial markets were working well and growth was still likely to accelerate.

The S&P 500 rallied 0.6 percent, taking back some of the 3.5 percent drop the previous day.

Last week, the index capped its worst three-week sell-off since February 2003 and the lack of scheduled events meant that this time, investors had no reassuring words from the Fed chief.

Neither Bernanke nor Vice Chairman Donald Kohn has spoken in public since July 19, leaving commentary to lower-ranking officials such as Governor Randall Kroszner, who said the ``real economy does not yet seem to be affected.''

"Some sort of statement from the Fed that they stand willing to provide additional liquidity might help confidence,'' said James Nixon, a former forecaster for the ECB and BOE who is now an economist at Societe Generale SA in London. Trichet went some way to calm the market.