When it comes to open-market operations, the Federal Reserve is anything but open. Here's how the world learns about what the Fed has in mind on any given day:
At about 11:29 a.m., a wire-service reporter places a call to a primary dealer of Treasury securities. At 11:30, another reporter calls the public information officer at the Federal Reserve Bank of New York.
The first reporter shouts, "Add, $2.5 billion, customer repo," meaning the dealer said the Fed entered the market and added $2.5 billion in reserves to the banking system via a repurchase agreement for a customer, usually a foreign central bank.
The second reporter then confirms the action with the New York Fed. The official simply confirms or denies the action without the embellishment of an explanation. A headline goes out to the wire service's subscribers.
A legion of money market economists then interpret the action, which more often than not is routine and without importance to monetary policy.
Demand for More Openness
Why such a convoluted system? That question is being asked by lawmakers and economists, who increasingly are demanding more openness.
"I don't know why the Fed needs to send a signal," said Sung Won Sohn, chief economist at Norwest Corp. "Why can't they just say what they are doing in English?"
The secrecy starts with closed meetings of the Federal Open Market Committee, which sets the Fed's monetary policies. An edited version of the minutes of those meetings is not released for six weeks.
House Banking Committee Chairman Henry Gonzalez, for one, wants the Fed to release the FOMC minutes sooner and has proposed videotaping the proceedings.
The secrecy then extends into the transactions conducted by the New York Fed to implement the FOMC's policies.
Danger of Mixed Signals
The lack of openness can have major consequences.
For example, just before Thanksgiving in 1991, the Fed added reserves in a transaction widely interpreted as an of credit conditions.
It was not an easing, and the Fed later that day had to hustle to inform the market that it planned an offsetting move the following Monday.
"Everyone misinterpreted the move," said John Lonski, economist for Moody's Investors Service Inc. "Why not go ahead and explain actions to the public?"
A misreading of a Fed signal can be costly.
For the sophisticated trader or investor, it could mean a wrong hedge. For the average American, it could mean a lost investment or a hasty decision on a mortgage.
The Fed does announce changes in the discount rate to the public, but the Fed's manipulation of its target for the funds rate amounts to a game of charades between the central bank and economists.
"Announcements on the federal funds rate would threaten the livelihoods of Fed watchers," Mr. Lonski quipped.
Sunlight in Germany
Curiously, even Germany's Bundesbank hardly an open institution, announces changes in key money market rates as they are implemented.
Defenders of the system say the Fed needs to keep the public in the dark about its decisions temporarily to give itself flexibility and to maintain orderly markets.
"What we try to do is to create various different alternative paths that policy might take in the intermediate period, depending on certain events that could occur," Federal Reserve Board Chairman Alan Greenspan said at his Humphrey-Hawkins testimony before the House Banking Committee last week. "If we were to publish that immediately, the financial markets would respond and adjust to expectations of how we might or might not behave."
Charles Lieberman, economist at Chemical Securities Inc., endorsed the current setup, noting that it is part of a system that effectively insulates the Fed from political pressures. He noted that in most cases "it doesn't take a brain surgeon to figure that there might be a tightening of policy."
"The lag [in releasing FOMC minutes] gives the Fed room to maneuver and the ability to rethink its position," said Kathleen Stephansen , senior economist at Donaldson Lufkin & Jenrette Securities Corp.
But even some of the Fed's strongest backers blanch at one recent variation on the Fed's policy: leaking FOMC deliberations to some members of the press.
For example. both the Wall Street Journal and CNBC in May correctly reported the FOMC's decision that month to switch from an easing to an tightening mode. The CNBC report also correctly reported that two governors dissented -- one who wanted an immediate tightening and the other who wanted to keep rates stable. Minutes of the meeting, released this month, confirmed the reports.
"They should broadcast the information or say nothing," said Eugene Sherman, economist at M.A. Schapiro & Co.