April 27, 2011 was a day like any other. It passed by quickly and was largely forgotten. But in retrospect, it represented a key moment in the history of monetary policy.
That was the day that the chairman of the U.S. Federal Reserve gave a press conference. The substance of the press conference itself was not news, but the fact that the event happened was.
Until that day, Federal Reserve decisions were shrouded in secrecy. When the Fed’s Open Market Committee issued a pronouncement, each word was closely scrutinized by investors and analysts, looking for clues to the direction of interest rate movement, and the likely impact on equities, bonds, housing markets and other pillars of the economy.
Journalists huddled outside the Eccles Federal Reserve building in Washington waited for the slightest puff of smoke, the faintest gust of news, to understand which way the economic breezes would be blowing.
Federal Reserve chairmen rarely lifted the veil. When they commented on policy, the meaning was as vague as a Nostradamus quatrain.
Alan Greenspan perfected this art. The 90s-era Fed Chairman at times created his own vocabulary, inventing such memorable terms as “irrational exuberance.” He was well aware of the effect of his calculated ambiguity on trends and traders, once joking at a congressional hearing: “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”
That tradition ended on April 27, 2011, when his successor, Ben Bernanke, walked up to a bank of microphones and announced: “It used to be that the mystique of central banking was all about not letting anybody know what you were doing. 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.”
On one hand, investors welcomed the new clarity. Decisions by central banks, whether the Federal Reserve, the Bank of Canada or the ECB, drive interest rates, control the expansion of the money supply and become the prime variable in many investment decisions, from homebuying to the purchase of corporate bonds.
A public-facing Fed affects the American economy and the world more directly than during the days of private institutional decision-making. Interest rates are the monetary throttle that controls the velocity of economic activity. Too much monetary tightening can tip a nation into recession, while the extremely low rates that had been typical since the financial crisis of 2008 can create asset bubbles and sustain unrealistic valuations of companies.
The biggest effects of Fed transparency were felt at the upper levels of finance. Some of the most agile players in finance manage portfolios for large hedge funds. In the past, they needed to rely on their accumulated knowledge and intuition to forecast the direction of interest rates, and the most gifted among them were richly rewarded for their bets on companies and industries.
In Canada, Anson Funds is known as this type of hedge fund, one that can pivot when central bankers signal policy changes, setting in motion a cascade of investment decisions throughout the economy. Anson Funds co-founder Moez Kassam shares his thoughts on interest rates and other key variables regularly with analysts, peers and business writers.
Last year he told Reuters: “Our macro view centers on inflation. It will stay elevated longer than most expect.” This was based in part on the Fed’s interest rate equivocation in the early stages of the inflation cycle. With a clear-eyed view of inflation trends, the Anson Funds team was able to unlock new investment opportunities across North America.
More than a dozen years after Bernanke took the Fed public, some traditional analysts still worry about the downsides of a more candid Open Market Committee. Where there are cameras, there are suddenly actors, people in the frame of the lens who believe they can be or should be a celebrity.
There is a centuries-long record of comparatively dull bankers making important decisions that transform lives and industries. A celebrity setting monetary policy is a new phenomenon for the Fed, and uncharted territory for world economies.
