Tuesday, March 28, 2006

Clear Messages, Mixed Signals

The Federal Open Markets Committee will be meeting today--the first since Ben Bernanke became Chairman of the Federal Reserve.  According to this story in the Post, he will start pushing for changes to make the Fed more transparent.
Before you day traders and currency speculators start salivating, this transparency is going to look nothing like the real time data we can pull from the NYSE (for a huge fee) or documents to be Foiled shortly after meetings to help corner a market or predict future actions.  I'm afraid the proposed changes might be even more, if I can steal a word from my favorite septuagenarian economist, pernicious.
As much as markets only function when there is fair and open access to information, and people have a reasonably equal ability to act on it, when a body that--in effect--moderates and modulates the market is too open for observation, I worry there might be too much room for market speculation.  This is going to be somewhat strange, since one of the positives of Greenspan's tenure at the helm of the Fed was that he was methodical about telling the markets what he wanted to do with the FOMC before they would actually do it.  This allowed the markets to start adjusting to potential changes, or encouraged them to continue as normal if the status quo was upheld. 
Bernanke's goal of the FOMC setting inflation targets, seems to me to be--in another stolen word--oversharing.  I don't care if the Fed wants to set inflation targets.  In fact I think it's probably a good idea.  But that doesn't mean I want the markets to know exactly where those are set.  Because if something happens to the market or the economy that was unforeseen, or even unforeseeable, missing the inflationary targets could start a huge scare on the market.  It could begin to erode people's confidence in the Fed.  And if that happens, convert your Dollars to Loonies and get to Toronto in a hurry!

No comments: