Bernanke and the Fed: Turning towards open

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The Federal Reserve System (FRS, FRB, FED, "the Fed," see Wikipedia) took form in 1913 when Congress passed the Federal Reserve Act. It established the ruling bodies, set up a few oversight committees, and granted certain abilities that were intended to help regulate and stabilize the banking industry.

This year, the Fed held their first full press conference, with the Reserve Board Chairman taking questions.

The US Reserve's policy on privacy

How much do you know about the US federal banking system? I wouldn’t wager much on it as a trivia category. But a quick dig through the dot-gov end of the Internet gives a little background, with a special eye towards transparency. (If you’re unfamiliar with the structure of the organization, as I was, and want to become familiar, see the brief civics lesson and links below.)

Under Reserve Board Chairman Ben S. Bernanke, meetings of the Board of Governors and Boards of Directors of the Federal Reserve fall under the sections of US code known as the Sunshine Act, requiring that they be conducted--as much as possible—in public view. For the Fed, this means they announce meetings, publish the agenda, and allow the public to attend. Two years' worth of public media archives are stored on audio tape. (An amusing detail—"audio tape." I wonder when this will, if it hasn’t already, switch to cheaper, faster, digital media?) Notes and memos from each meeting or that are the result of such a meeting are released. Certain allowances are made for private topics—institutional or organizational confidentiality related to corporate financials or personnel, issues of national security, and the like—but, as the sunshine laws intended, the default state of affairs is open.

Open and in the news

On April 27, 2011, the Fed took their open policies a step further. Ben S. Bernanke, Chairman of the Federal Reserve, exited a quarterly policy meeting and took a press conference. This engagement with the press is one of four scheduled over the next year, a regular opportunity to discuss inflation, the economic crisis, and the present and future policies the Reserve considers.

Is this unusual? Well, no. In the United States, perhaps, but the European Central Bank has been publishing not only standard press releases, but recording, webcasting, and transcripting (in 22 languages) both meetings and post-meeting press junkets for several years. But in the US, it is unusual.

And it comes on the heels of the some forced disclosure for the Fed. Though they appealed to the US Supreme Court to keep the info confidential, in March, the Fed was compelled to reveal certain loan recipients during the mortgage crisis.

Bernanke’s prepared talk revolved around crisis-related economic issues—his brief agenda outlined the recent policy decisions by the FOMC, their quarterly economic projections, the intersection of those two topics, all with a focus on twin goals of maximum employment and price stability. He then took questions.

Questions revolved around the forecast—slightly weakened—and the rise of inflation due to higher fuel and product costs, and the stimulus the Fed provides, specifically that to counter rising inflation and continued high unemployment.

The Federal Reserve, like most organizations today, has a YouTube channel. The press conference, speeches, and other informational videos are available on-demand. Go forth and learn about federal banking—it’s getting easier, because it’s more open.

In Bernanke's own words

Bernanke was asked, specifically, his thoughts on the Fed’s new, more open practices. He replied, at length:

“...the Federal Reserve has been looking for ways to increase its transparency now for many years, and we’ve made a lot of progress. It used to be that the mystique of central banking was all about not letting anybody know what you were doing. As recently as 1994, the Federal Reserve didn’t even tell the public when it changed the target for the federal funds rate.

“Since then, we have taken a number of steps. A statement, which includes a vote. We have—we produce very detailed minutes which are released only three weeks after the meeting, which is essentially a production lag. We now provide quarterly projections, including long-run objectives as well as near-term outlook. We have substantial means of communicating through speeches, testimony, and the like. And so we have become, I think, a very—a very transparent central bank.”

Bernanke went further, suggesting that the press conference was one of several changes the Fed would consider, to promote accountability and open proceedings:

“...the press conference was—came right to the top, because this is an area, first of all, where global central bank practice includes now—many central banks do use press conferences, and we have some experience with them.

“And, secondly, it does provide a chance for the Chairman, in this case, to provide some additional color and context for both—in this case both the meeting and the projections that are being made by the Committee. So we thought it was a natural next step. We’re not done. We’re continuing to look for additional things that we can do to be more transparent and more accountable. But we think this is the right way to go.”

Changes he personally and professionally agrees with:

“And I personally have always been a big believer in providing as much information as you can to help the public understand what you’re doing, to help the markets understand what you’re doing, and to be accountable to the public for what you’re doing.”

Despite the Fed’s (somewhat recent) history doing the opposite:

“Now, of course, the Fed didn’t do this for a long time. And I think the counterargument has always been that, if there was a risk, that the Chairman speaking might create unnecessary volatility in financial markets or may not be necessary, given all the other sources of—of information that come out of the Federal Reserve. It was our judgment, after thinking about this for some time, that at this point, the additional benefits from more information, more transparency, meeting the press directly, outweigh some of these—some of these risks. And I think, over time, you know, we’ll experiment to try to make sure that this is as effective a venue as possible.”

Is this sunny change in attitude a sign of brighter times in the banking industry? Are the risks that kept the Fed reserved for so long real? Do economic worries or industry missteps make a more compelling argument for transparency in large, critical parts of our infrastructure? Feel free to discuss.

A brief civics lesson

The Fed today looks a bit different from the Fed of 1913. Today’s Reserve comprises:

1. The Board of Governors

Appointed by the president for single, 14-year terms, these seven board members are appointed, each coming from one of the 12 Federal Reserve Districts. Districts unrepresented on the Board of Governors are usually represented by one of the Reserve Bank presidents in the Federal Open Market Committee (FOMC).

2. The Federal Open Market Committee

This group includes the members of the Board of Governors, as well as five Reserve Bank presidents. Of those five reserve presidents, one is always the president of the Reserve Bank of New York. The other four reserve presidents serve only year-long terms.

3. The Federal Reserve Banks

The twelve Federal Reserve districts each have their own banking institutions, that provide normal banking services as well as national banking functionality—things like bonds and Treasury business, and make and accept payments and accrue interest on national debts or loans. They also have some power over state-level banking institutions.

4. The Federal Reserve Banks Board of Directors

This group includes both directors of the Federal Reserve Districts, as well as directors of the districts’ member institutions.

The Board of Governors is where you'll find the head honchos. The Chairman of that board (Bernanke), is the head honcho of the head honchos. The Federal Reserve Banks and their operating institutions do the daily work of carrying out the regulation of banking and financial policies in the United States.

Did you know?

While looking into the Fed’s decision to go public, I learned other interesting tidbits about national and international banking systems. For instance, did you know:

That the US federal banking system also manages money for other countries? Take Ecuador, for example. They use the US dollar, and though they now have some control over their banking practices, many important fiscal policies are decided by the US Fed that carry over into their economy.
Canadian banks are considered the most sound (p.121), well-managed and -regulated of the world’s institutions? Canadians get good hockey and great banks.

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