Economists Mixed on Fed's New Transparency Push

Economists are generally welcoming the news that Chairman Ben Bernanke will increase transparency at the Federal Reserve by doubling the frequency of its economic forecasts and extending their time horizons to three years. Some market experts, however, said these changes would lead to information overload and limit the effectiveness of the Fed's policies.

"There can be a thing as too much transparency," the chief economist at Mission Residential, Richard Moody, said. "If you take away the element of surprise, and the market already knows what the Fed is going to do, it makes their policies less effective."

In a speech to the Cato Institute in Washington, D.C., Mr. Bernake laid out a sweeping new plan that would double the Fed's forecasts of economic growth, unemployment, and inflation to four times a year and extend the time periods they cover.

"Good communications are a prerequisite if central banks are to maintain the democratic legitimacy and independence that are essential to sound monetary policymaking," Mr. Bernake said in the speech. "A considerable amount of evidence indicates that central bank transparency increases the effectiveness of monetary policy and enhances economic and financial performance," he added.

Mr. Bernake also announced that the Fed would begin providing commentary to explain the rationale for its decisions.

"Accompanying the numerical projections will be a discussion — a projections 'narrative' if you will — that summarizes participants' views of the major forces shaping the outlook, discusses the sources of risk to that outlook, and describes the dispersion of views among policymakers," he said.

The effort to increase transparency will begin next Tuesday, when the Federal Open Market Committee will release projections for inflation-adjusted gross domestic product, unemployment, and inflation, in addition to the minutes of its October meeting. The Fed normally releases its projections when it provides economic reports to Congress in February and July. It will continue to release forecasts then, but will also provide them along with the minutes of its meetings that occur at the start of the second and fourth quarters.

Many economists welcomed the news. "This will provide a lot of useful insight for economists and market participants," a managing director and the chief economist at Nomura Securities, David Resler, said.

Others said this increased transparency could bog down the market. "This is a case of information overload," the chief economist at Moody's Investors Service, John Lonski, said. According to the new guidelines, "each of the seven governors and the 12 Federal Reserve presidents will reveal their forecasts. Does this mean that interest rates will follow a different path than they otherwise would have? Probably not."

Fed officials could also begin to voice similar opinions about the economy to prevent any possible humiliations when their views are published publicly. "In order not to embarrass themselves, there will be a tendency to congregate around one similar view on the market," Mr. Lonski said.

By frequently publishing its views on the direction of the economy, the Fed could also find itself hemmed in by its own forecasts. "By putting out forecasts and sharing all this information about its thinking behind the numbers, the Fed could paint itself into a corner," Mr. Moody said. If the Fed continuously discloses its views, it will set expectations for what is coming next, and then it will be difficult to deviate from those expectations without throwing the market into chaos, he said. "Its almost like the tail is wagging the dog — the Fed should be leading the market, not following it," Mr. Moody added.