It Would Be a Shock If the Fed Were To Change Its Policy

It would be shocking if the Fed were to change monetary policy in any notable way at the FOMC meeting that concludes today. One reason is that the recent data have been consistent with the Fed's outlook for moderate growth with low inflation, and thus won't prompt a shift in either the ongoing taper of the Fed's asset purchases or its forward guidance for the federal funds rate. Another reason, however, is simply that Fed Chair Yellen does not have a press conference after this meeting.

Former Chair Ben Bernanke began the press conferences in April 2011 as part of the Fed's longstanding effort to make monetary policy more transparent. The press conferences coincide with the release of the FOMC's economic forecasts, which currently occurs at the meetings in March, June, September, and December.

The state of the economy, and hence the need for policy action, isn't systematically different at those four meetings than at other times of the year. If the press conferences had no effect on the timing of policy changes, we should see that the FOMC has acted about as frequently at the press-conference meetings as at the other four meetings each year.

The record shows this is not the case. In fact, the last time the FOMC changed policy without a press conference was in September 2011, when it started Operation Twist, the asset purchase program wedged between QE2 and QE3. Since then, 55% of the meetings with a press conference (6 of 11) have produced a significant policy change, while the meetings without a press conference are batting 0 for 9. The probability that this difference reflects random chance is very small.

The FOMC tends to act at meetings with press conferences for a good reason: the chair has an opportunity to provide a more complete explanation for the policy change than is possible in the written statement that follows every meeting. If handled well by the chair, the press conferences can be a constructive part of the Fed's ongoing conversation with the financial markets and the public about monetary policy.

So, if the press conferences are a valuable tool, why not have one after every FOMC meeting? Rep. Ed Royce (R-California) asked Chair Yellen exactly that question in a written follow-up to her February testimony before the House Committee on Financial Services. She responded that the current schedule would remain in force, noting that "Whether there is a scheduled press conference or not, every FOMC meeting is a meeting in which a policy decision can be taken." True, but the real question is whether the schedule of press conferences affects the likelihood that a policy action will be taken at a given meeting. The Committee's own behavior clearly indicates that the schedule matters.

One FOMC member, President James Bullard of the St. Louis Fed, has publicly acknowledged the influence of the schedule and has advocated that the chair hold a press conference after every meeting. Bullard is concerned that the FOMC's preference for making policy changes at press-conference meetings has distorted the timing of the FOMC's actions in some cases and will continue to do so in the future. That's a legitimate concern. With a press conference after every meeting, the FOMC could make decisions based solely on the incoming data and its economic outlook, as it should, without an eye on the calendar.

Any such change would need to be led by the chair, but Yellen clearly is not enthusiastic. These encounters with the press require a lot of preparation and there is always the risk of causing a stir with the wrong choice of words. Yellen felt this first-hand at her initial press conference last month, when she suggested that the first rise in the federal funds rate would come about six months after the end of the Fed's asset purchases - an earlier lift-off than the market had expected. In all likelihood, she had intended to say "at least six months," but those weren't the words that came out of her mouth. This experience could only have hardened her resolve not to face the press any more often than is absolutely necessary. And if Yellen is unenthusiastic, there is little upside for individual FOMC members to press the issue.

The current situation, though, leaves the FOMC in the uncomfortable position of saying that the schedule of press conferences doesn't matter but behaving as though it does. There are only two ways out of this bind. The first is for the FOMC to change its behavior and treat each meeting as being on equal footing. That would require breaking some deeply ingrained habits, which would not be easy. The other option would be for Yellen to reverse course and agree to hold a press conference after every meeting. Neither is likely in the near term. But if the press, Fed-watchers, and the academic community persist in highlighting the disconnect between the FOMC's words and actions, the Committee ultimately may relent in order to preserve its credibility.