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Greenspan Creates Panel Evaluating Procedures for Fed Public Statements

By John M. Berry

Federal Reserve Chairman Alan Greenspan is famous for using obscure circumlocutions that sometimes leave listeners scratching their heads. Shortly after he become chairman in 1987, he quipped, “Since becoming a central banker I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”

But in August, even Greenspan appears to have acknowledged that the Fed may want to be a bit clearer in public statements. Fed minutes released Thursday show that Greenspan created a committee two months ago to study “whether some adjustment in its procedures would be helpful.”

Greenspan’s concern stems from a change in Fed policy implemented in May, when the central bank’s top policy-making group, the Federal Open Market Committee, began announcing not just changes in its targets for interest rates but also which direction the rate-setting group was leaning regarding possible future rates.

After its May announcement that the FOMC hadn’t raised rates but had adopted an “asymmetrical” stance -- an indication that the next move on rates would likely be an increase -- financial markets reacted as if rates had already been increased.

In a sense, the Fed’s new openness had, in the mind of some officials, backfired. Part of the problem was that investors and analysts didn’t fully understand what was meant by the terms “symmetry” and “asymmetry.” There was widespread disagreement among FOMC members about the precise meaning of the terms as well.

Some Fed watchers, such as Goldman Sachs Group Inc. chief economist Bill Dudley, suggested the concept of symmetry was so confusing that the FOMC ought to drop the terms and simply tell the public what it wanted to convey.

The group reviewing the Fed’s pronouncements is headed by Fed Vice Chairman Roger Ferguson and includes Fed board members Edward M. Gramlich, Edward W. Kelley Jr. and Laurence H. Meyer and three Federal Reserve bank presidents, Michael H. Moskow of Chicago, Robert T. Parry of San Francisco and William Poole of St. Louis. It is expected to make recommendations no later than next spring.

The new pronouncements created problems because “the sentence relating to symmetry of the (FOMC) directive was subject to differing interpretations,” according to minutes of the Aug. 24 policy-making session.

FOMC members “also had expressed some discomfort with the way these announcements had been interpreted,” according to the minutes. “While the committee did not contemplate retreating from its policy of immediate announcements, it might want to examine whether some adjustments in its procedures would be helpful.”

In the wake of the May announcement that the FOMC was leaning toward higher rates, the committee did raise the target for the federal funds rate by a quarter of a percentage point, to 5 percent. The federal funds rate is the interest rate financial institutions charge one another on overnight loans.