Fed Transparency and Obscurantism

Question: docstocks asked

As I’m sure you know, the House just passed the ‘Audit the FED’ bill. Putting aside the merits of this bill, which I’m sure is just an attempt by Ron Paul to constrain the FED, what are the reasonable arguments for and against more transparency at the FED?

Answer: In general, I think that more transparency is good, on the grounds that it helps generate discussion of policy that can gradually improve policy. You will generally see me arguing for more transparency. However, in my post “Going Negative: The Virtual Fed Funds Rate Target,” I argued that sometimes, in order to avoid headlines that would generate political heat on the Fed and so possibly compromise Fed independence, it is a good idea for the Fed to provide enough information for people to figure out what it is going to do, but not connect all the dots to say that it will buy yeay many gigadollars or teradollars worth of certain assets. In other words, the Fed should disclose things in a way that makes it very transparent for sophisticated Fed watchers. But in some cases it may be OK for the Fed to say things in a way that is a little obscure for the general public, which have to be explained to them by the journalists covering the Fed. Even for the general public, it can be argued that this is in service of the maximum level of understanding, since the initial impression that the issues are hard to understand and require reading a whole article rather than just a headline is accurate.

In the case of Fed actions during the financial crisis, which involved bailouts, in the end, I think the Fed has to report everything it has done, but if I were at the Fed in charge of that reporting, I would try to do it in a way that would make the most boring headlines possible given the inflammatory content.  

Despite my support for occasional obscurantism to keep political inflammatory dollar figures out of headlines so that people have to actually read the newspaper article to see them, I think the Fed in general should do everything reasonably within its power to help the general public understand monetary policy. On that score, I strongly favor Bernanke’s approach toward explaining monetary policy over Greenspan’s approach.