Once the most secretive of institutions, the Federal Reserve is grappling with the impact of its efforts this year to be more open about monetary policy.
"I think the Fed's communications strategy has yet to catch up with the increased openness," said Nicholas S. Perna, an economist at Fleet Boston Corp. "We may see more measured words for a while."
According to just-released minutes of its August meeting, the central bank's Federal Open Market Committee has established a subcommittee under Fed Vice Chairman Roger W. Ferguson to study the issue of disclosure and come up with "recommendations or at least some alternatives."
In contrast to its previous stance of speaking only after acting on interest rates, the Fed this year has issued statements after meetings of its policy-making committee about its "bias" on prospective rate changes.
In several instances, investors in equities have seized on this information and sent waves of buying or selling through the market. At least once, when the Fed announced a "neutral" stance after the rate hike on June 30, the market wrongly interpreted the guidance, assuming that further rate increases were unlikely. This turned out to be false; the Fed raised rates again in August.
After last Tuesday's meeting of the open market committee, the Fed said it had left rates unchanged but that its bias is now toward raising rates, perhaps at its meeting Nov. 16. The result was a fresh slide in prices of bank stocks and shares of other financial services companies.
Mr. Perna said he believes the Fed is gaining a better feel for making such disclosures and probably was not unhappy with the reaction last week. By contrast, if the previous policy of silence had been in effect, the market would have reacted in the wrong direction. But predictably, there has been criticism.
"It seems to me, the Fed ought to be focused on reducing the volatility in markets, and its procedures seem designed to do just the opposite," said Alan H. Meltzer, chairman of the Shadow Open Market Committee, a group of academic and business economists that monitors Fed policy.
"After they make an announcement, rates shoot up, then a piece of economic data comes in, and rates go down," he said. "In addition, a tightening or other policy bias means different things to different members of the committee. In 50% of the cases, a change in bias has not been followed by a change in rates."
Mr. Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh and an advocate of monetarist views regarding monetary policy, said, "It would seem a better idea to say what they are going to do and do it, like the British and some others do."
Misgivings were also expressed within the Fed last year as the new disclosure guidelines were being drafted. At last December's open market committee meeting, its minutes disclose, "members who favored more announcements believed that such disclosure ... generally would allow financial market prices to reflect more accurately the likely future stance of monetary policy."
But others "were concerned that such announcements often would provoke market reactions," the minutes said. And these others worried that this would have "adverse repercussions on the committee's decision-making."