A Fed Shrouded in Mystery Threatens Accountability and Economic Stability

Over the past century, the Federal Reserve and central banks across the world have continuously evolved toward greater transparency in their public communications. Monetary authorities were historically secretive and shied away from revealing too much information as central bankers believed that less communication preserved their policy flexibility. Silence insulated them from short-term political pressure, thereby improving monetary policy effectiveness—or so the argument went. Others were self-righteous and held that central banking was an “esoteric art” that should be confined to the “initiated elite.” In fact, Montagu Norman, Governor of the Bank of England between 1920 and 1944, a tumultuous economic period no less, had a famous motto: never explain, never excuse.

Recognizing that a country’s central bank wields tremendous influence over national economic conditions, there has been a recent push for more transparency in monetary policymaking. A growing literature—including research from this year’s joint-winner of the Nobel Prize in Economics, Michael Woodford—shows that more transparent monetary policy can be more effective in achieving central banks’ desired outcomes. And for the past three decades, that push has largely succeeded in the central banks of countries at various levels of development, the Federal Reserve included.

The Fed’s new chair, Kevin Warsh, however, has made it his mission to return to the dark age of central bank secrecy. As the Trump administration undermines the Fed’s independence and the United States faces macroeconomic uncertainty, the last thing our economy needs is a cryptic central bank.

A good life agenda requires a stable economic foundation, both for families to go about daily economic life and for policymakers to pursue progressive causes. Returning the Fed to its culture of secrecy is incompatible with achieving those goals.

As the Trump administration undermines the Fed’s independence and the United States faces macroeconomic uncertainty, the last thing our economy needs is a cryptic central bank.

The Rise of Fed Communications to Shape Market Expectations

Contrary to the historical case made for less transparency, clear central bank communication can actually improve monetary policymaking. In 1995, then–Fed Vice Chair Alan Blinder explained how a central bank that openly communicates has an opportunity to build credibility by delivering on its publicly stated goals. Communication can also make monetary policy more effective by shaping market expectations about future policy, creating predictability in both central bank decisions and market reactions, which in turn reduce economic volatility. A credible central bank can influence expectations without needing to act on the real economy. It was this logic that compelled then–Fed Chair Alan Greenspan to release the first-ever Federal Open Market Committee (FOMC) policy statement back in 1994.

By the end of his tenure, Greenspan himself noted a trajectory toward openness and said, “The importance of expectations has also shaped our increasing transparency about policy actions . . . We have moved toward greater transparency at a ‘measured pace’ in part because we were concerned about potential feedback on the policy process.”

His successor, Ben Bernanke, picked up the baton and pushed the Fed even further in the direction of open communications by relying heavily on forward guidance during the global financial crisis, eventually establishing the modern convention of quarterly public press conferences that Jerome Powell extended to follow each FOMC meeting. The purview of central banks grew to set clear expectations for both market participants and fellow policymakers, leading to Bernanke’s quip that “monetary policy is 98 percent talk and only 2 percent action.”

The Warsh Fed’s Attempted Retreat from Transparency

The clear benefits of transparency and steady increases in central bank openness were a part of a widely held set of beneficial norms, though they have not been codified in law. Over the decade after Bernanke stepped down as Fed chair, chairs Janet Yellen and Jerome Powell maintained these norms.

Warsh, however, has reached the opposite conclusion. At his first Jackson Hole Symposium as chair, he said, “Transparency in communications about future policy decisions is not a virtue unto itself.” He has suggested that the FOMC meet less frequently, hinted that he may hold fewer press conferences, and lamented that his FOMC colleagues publicly communicate too much. There may be even more proposals on the way, as one of the five task forces Warsh established is focused on Fed communications.

Partly driven by assessments of COVID-era monetary policy decisions, some policymakers have argued that forward guidance and communications need to be revisited. While there is merit in the belief that the Fed was underprepared for the post-pandemic inflation surge, and that unclear communication can be counterproductive, the impulse to overcorrect is misguided.

Secrecy benefits institutional investors, as highly informed traders rely on whisper networks and other information that is hidden from the public. Even in the absence of insider wrongdoing, higher market volatility tends to advantage sophisticated market participants who have the capital and infrastructure to capitalize on bigger and more frequent price swings. Warsh’s first few months in charge, indeed added to market volatility and created larger swings in expectations over Fed policy, contributing to rising yields that have increased borrowing costs during an already deep affordability crisis.

The market reaction certainly caught the chair’s attention as he later changed course in his Jackson Hole speech, speaking more openly about the Fed’s reaction function. By offering a clearer outline of how he perceived the economy and the Fed’s potential policy response, Warsh implicitly accepted the conventional wisdom on transparency when he needed to achieve a monetary policy outcome.

It was a welcome change, but not surprising as several market watchers urged him to reconsider his previous approach, including former New York Fed president Bill Dudley and former Cleveland Fed president Loretta Mester. For the sake of monetary policy and economic efficiency, it is imperative that the Federal Reserve return to its precedent of providing clear information for markets to function properly.

A Lack of Monetary Policy Communication Hurts Trust in Public Institutions

Transparency is the bedrock of a democratic society. Government officials that influence millions of livelihoods must be forthcoming about their decision-making; the Fed bears even greater responsibility because FOMC officials are not democratically elected and enjoy a great deal of instrument independence. Public communication is the only mechanism for everyday working people to hear from these key policymakers.

The general manager of the Bank for International Settlements, Pablo Hernández de Cos, put it best when he explained that “a key means of accountability [for central banks] is clear communication to explain policy decisions to the public, rationalising the central bank’s actions and describing how they help to achieve its mandate.”

Warsh’s attempted return to secrecy may backfire and erode public trust, given that support for the Fed is sensitive to the information people receive. To be sure, monetary policy should remain insulated from political pressure, as countries that do not have central bank independence suffer from unstable macroeconomic conditions and high inflation. That independence, however, must be exchanged for consistent, public clarity about the Fed’s decisions—otherwise our monetary authority risks losing its democratic legitimacy.

The Fed is no stranger to moments of public vulnerability that stem from its culture of secrecy. In 1993, Greenspan was at the center of a scandal after Congress learned that for nearly two decades, the Fed had privately retained FOMC transcripts after initially denying that these records existed. Only after then–House Banking Committee Chair Henry Gonzalez led pressure against the FOMC did it agree to publicly release its meeting transcripts on a five-year lag.

Over a decade later, during the global financial crisis, the Fed relied on its emergency lending authorities to rescue failing financial institutions. These operations were shrouded in secrecy, leaving the public without clarity about why the Fed saved some firms and not others. With nearly one trillion dollars on the line, Congress decided that this power was far too discretionary and later limited its scope by amending Section 13(3) of the Federal Reserve Act. But the damage was already done as the backlash against these bailouts helped fuel the Occupy Wall Street movement.

As the economy was in turmoil from COVID-19, FOMC officials were actively trading financial assets while simultaneously voting on consequential interest rate decisions. Those FOMC members eventually resigned, and the Fed has since voluntarily adopted new ethics rules in response. Still, a few years later, another official was implicated in ethics violations, suggesting that the Fed’s ethics problem remains unresolved.

Most recently, the Fed’s lead bank regulator attended and spoke at an invitation-only private dinner with bankers that she is supposed to have oversight over. The lack of transparency, coupled with behavior that weakens public confidence, highlights not only the need to reject Warsh’s endeavor of a more secret Fed, but that there remains much work to be done.

Any significant push for Fed reform must come from Congress.

Policy Options for Congress to Promote Fed Transparency

Any significant push for Fed reform must come from Congress. When changes to the institution are substantive enough to have serious implications for the US economy and democracy, then Congress, the democratically elected body, should be at the forefront of the debate. Whether one agrees with Warsh’s proposed direction is second order. The FOMC alone should not be able to claw back the transparency it has established—at times under congressional pressure—over the past three decades.

This issue warrants legislative debate because communications are not only a tool for the Fed to conduct monetary policy, they are a mechanism for accountability. In the context of financial regulation, Fed scholar Lev Menand argues that Congress should be more involved in managing the economy, and that responsibility should extend to changing the way the Fed communicates. Under the second Trump administration, several norms across the federal government have been shown to be weaker than once thought. Congress must therefore amend the law to preserve the Fed’s transparency.

1. First on the agenda should be codifying the Fed norms that have served the economy well. Congress need not be prescriptive or encroach on the Fed’s independence in setting monetary policy, but it should codify the Fed’s current levels of transparency as a floor without establishing a ceiling that could constrain better and more accountable policy in the future. Since 1981, outside of financial crises, the FOMC has met eight times a year to assess economic conditions and vote on monetary policy despite Congress only mandating a minimum of four meetings a year. If Warsh wants to meet less frequently, Congress should revisit the question (perhaps even including the chair’s input). Eight meetings a year should be the new statutory minimum, solidifying the practice over the past 45 years and providing the FOMC with ample flexibility to monitor incoming data.
   
   
2. Next, Congress should ensure that the current and consistent practice of Fed policy communication is maintained. As mentioned, by the Fed’s discretion, policy statements were nonexistent until 1994, and individual FOMC vote tallies were not revealed publicly until 2002. To hold Fed officials accountable, Congress should codify the requirement that monetary policy choices and individual vote records be made public immediately following every FOMC meeting. Finally, whatever one’s opinion may be of the Summary of Economic Projections, it is clear that the public desires to have and should have some insight into the Fed’s views on the economy. Whether in the form of a dot plot or another kind of forecast, anonymized or not, Congress should require the Fed to offer a periodic outlook to enable longer-term household and business planning.
   
   
3. Warsh’s belief that press conferences should be reserved to “deliver important news” is insufficient reasoning to hear less from the Fed chair. Therefore, Congress should amend Section 2B of the Federal Reserve Act to require the Fed chair’s testimony six times a year. That mandates a visit to the Hill once every two months and allows the public and elected officials to hear about the chair’s decision-making more frequently. This would create a virtuous cycle of a more democratically accessible Fed, and a legislature with more incentive to invest in the expertise required to hold it accountable. 
   
   In their current iteration, the Humphrey-Hawkins hearings provide legislators too little time to cover six months’ worth of questions about the economy. Senators and members of Congress also devote hearing time to other questions surrounding ethics or supervisory matters, leaving less opportunity to cover substantive monetary policy.
   
   
4. In addition, Congress and the public should hear from the rest of the Federal Reserve Board of Governors, requiring testimony from each of them at least once a year. As the chair will testify six times a year, that means they can be paired with a Fed governor to answer questions. Hearing from other Senate-confirmed officials will offer insight into the range of views at the Fed and continue to strengthen accountability.
   
   
5. Finally, a complex financial institution like the Fed needs ethics reform set by Congress. The scandals arising from a body that already enjoys a great deal of independence call for guardrails to uphold public trust. Part of these reforms would include banning private events with people that the Fed is meant to regulate. While it would be a mistake and impractical to isolate FOMC members from financial market participants, there should be public readouts of private meetings with Fed officials that provide at least an idea of what is discussed behind closed doors. And to avoid the perception of creating whisper-networks, attention should also be devoted to official rules regarding conference visits that are largely inaccessible by the public because of high costs.

Altogether, these reforms would sustain the Fed’s progress on transparency and protect against the threat of secrecy that Warsh has raised.t against  the threat of secrecy that Warsh has raised.

Conclusion

The Fed’s crucial role in the modern economy cannot be overstated, and increased transparent communication has helped create more effective Fed policy. Chair Kevin Warsh’s effort to return to a cryptic Fed is a wake-up call for Congress; legislators must act to prevent backsliding and maintain the transparency the Fed developed over the past few decades. And to truly deliver a more democratic Fed, and more effective monetary policy, Congress must prioritize codifying additional Fed accountability practices. Otherwise, the Fed risks returning to the dark ages of central banking.