Monetary policy is now facing contradictions. There is good reason for the Federal Reserve to stand pat: The recovery clearly has a little more strength.
However, there also is good reason to ease a bit more: The recovery is stil fragile.
And finally, there is good reason to make it clear to the markets that the Fed is prepared to tighten if necessary: Inflation remains a threat.
The policy debate at the recent Federal Open Market Committee meeting must have covered such a spectrum. And the decision embodied in the resultant policy directive apparently encompassed the full range of possibilities, at least insofar as can be deducted from leaks, advertent or inadvertent, in the press last week.
Could Go Either Way
The Fed decided to stand pat for the immediate future, while also adopting a "sysmmetric" directive, which literally implies that policy is equally likely to ease or to tighten in coming weeks. However, in the short run, the most likely policy stance is no change or a slight easing, given existing monetary and economic conditions.
This symmetric directive, then, is basically saying that easing is not as likley as it had been and that the policymaking commiettee is beginning to think of the circumstances under which it might tighten.
While there may be good reason for the Fed's policy stance, it is underotunate that the decision was revealed by a leak to the press. In this case, a leak to one major seems to have been at least a semiofficial background explanation to another prominent daily.
The bond market unraveled after the first leak. Given the surrounding economic circumstances and the market's disgruntlement, it only partially knit itself back together after the explanation.
|Hints' Move the Markets
This latest episode is one of a series in recent years in which policymakers seem to have given hints about the direction of policy apart from the official published record. Sometimes, the hints have misled, or at least published record. Sometimes, the hints have misled, or at least been misinterpretend by, the market.
Needles market volatility is the result. But questions also are raised about the Fed's ability to manage its own house.
These are not just ephemera. Tangible harm to the country results in the longer run. In particular, a greater risk premium is built into the yield curve, keeping long-term rates somewhat higher than they would otherwise be.
The market seeks to protect itselt not only against the potential day-to-day costs of greater volatility but also against the possibility that leaks may reflect a policy process that is not working well. Policymakers obviously can and should disagree as they debate policy. But a decision once made should speak for itself.
One obvious solution is to publish the policy directive immediately after its adoption. Many market participants and others have advocated that. I, personally, prefer the present schedule of releasing the directive after a lag because I think it makes for a better policy process.
Immediate publication of the directive may be preferable to leaks, however, though three real problems would crop up.
First, much of the policy debate would focus on so-called announcement effect - to the detriment of intellectual energy devoted to basic problems.
Announcement effects are difficult to foresee and rather unimportant in the long run, but human nature being what it is, they would assume importance in the debate and could well come to color the basic decision and its timing.
More Meeting Could Result
A second problem is that the policy decision would necessarily become very short-run. Most likely, the directive's publication would immediately drive the Fed to more frequent policy meetings focused on federal-funds rate decisions made, say, biweekly or even weekly.
It would reduce flexibility and also the ability to focus operations more automatically on longer-run monetary targets. Of course, except for publication, that would not be too different from the current process - if the policy committee were to give the Fed chairman little or no discretionary authority.
A third problem is the risk that the decision would become excessively politicized. Just consider the inevitagble follow-up questions from the press to the administration or to Congress about whether they agree with a directive.
And there would always be the problem that some policymakers might not resist the temptation to tone up the market's response to a decision through comments after the announcement.
All in all, with regard to specific policy decisions, it is best to let the policy be revealed in action and to let the chairman and the record speak for the committee. The trouble is we don't seem to be living is such a world now.
Mr. Axilrod is vice chairman of Nikko Securities Co., New York.