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Fed Speechmaking Numbers could be Guide to Economic Conditions

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John Robertson

Fed policymakers speak more when times are good and less when conditions are weakening. They appear as prone as anyone to bouts of exuberance and pessimism reflecting the state of the economy.

The U.S. Federal Reserve system, like so much of the U.S. government, was designed to ensure diverse opinions and countervailing sources of power. There are 12 regional Federal Reserve banks each responsible for overseeing the conduct of financial institutions within their respective regions.

Each of the regional board presidents sits on the Federal Open Market Committee, the principle monetary policymaking body, although they are not all voting members. Voting is rotated on an annual basis so that only five regional Fed presidents, including the president of the New York Federal Reserve, can vote at any time.

The other seven voting members of the policy setting committee are members of the Washington based Federal Reserve Board of Governors each of whom is nominated by the president of the USA and approved by the Senate for a term of 14 years.

While the Federal Reserve chairman wields considerable influence and, from Volcker through Greenspan and Bernanke, have been among the highest profile policymakers in the world, the other board members are also influential. They each come to the decision-making task with a separate philosophical viewpoint and a practical view as to the outlook for the U.S. economy based their own research and regional background. They cannot be dumped because of their views.

Once a quarter, the Fed now releases the forecasts of each of the committee members so observers are able to see their evolving thoughts about growth, inflation, unemployment and other key variables that are of primary interest in setting monetary policy.

Under Bernanke, too, communication policies more broadly have become a tool in ways that had not been used previously. Markets would certainly hang on everything Greenspan said about the current state of the economy or the future direction of policy but the current board has sought to go further by setting out clearly defined pathways for policy so as to add certainty.

There has been some debate about how effectively Bernanke has communicated policy especially in the last few months as speculation about the ending of the Fed's asset buying program mounted.

Nonetheless, there has been a change in approach. Greater openness has evolved as markets have clamoured for more information and communication platforms have proliferated.

The changed approach has also been a product of the times and may not have emerged so clearly if economic problems had not appeared so intractable and traditional instruments so ineffective.

The Fed has not only caused interest rates to be unprecedentedly low but also embraced certainty about their level as an additional policy tool. Interest rate certainty has been thought necessary to encourage bankers to lend and businesses to take advantage of low interest rates. Knowing how long interest rates are likely to stay low without having the uncertainty that comes from second guessing future policy settings should encourage both lenders and borrowers to engage in economic activity.

Public speeches by Fed officials have been another way in which policy has been communicated. With the potential for differing views among the governors, these speeches are often picked over by Fed-watchers to discern early signs of any change in policy.

Fed decision makers have significantly reduced the frequency of their speaking engagements over the course of the current economic downturn. Public records since 1997 detail the speeches made by Federal Reserve officials. For example, in 1997, there were 45 public addresses. That number gradually increased over subsequent years to 76 in 2002 and 102 in 2004.

The chart at http://www.eimcapital.com.au/PortfolioDirect/daily_views.htm shows the number of speeches made each year and the extent to which U.S. GDP growth was above or below average at the time. The relationship between the number of speeches and the quality of the national economic performance is quite stark. Officials are more likely to be out talking when conditions are improving and less likely when conditions are on the slide.

Of course, the connection may not be in a single direction. For example, officials may be willing or even keen to speak but not receive any invitations. The volume of their speechmaking could be demand driven as much as subject to supply side constraints. The better the news is likely to be, the numbers would suggest, the more people want to hear.

Whichever way the line of causation runs, the frequency of appearances by Fed officials may be just as telling as what they say. Even if the content of speeches is unexceptional by most standards and of little apparent interest to market commentators, the simple fact that a speech has been made should be worthy of being included in the battery of US economic statistics.

As a year progresses, we should be able to infer something about the underlying level of confidence about the U.S. economy from the commitment to talking about it.

In 2012, the number of speeches dropped to an all time low. That was consistent with pervasive pessimism about the weakness of the U.S. economy and widespread disappointment that labour market conditions were not improving more rapidly.

While the year is not over yet, the number of speeches has just equalled the number in 2012. Adjusted for the time remaining in 2013, there has been a modest rise in Fed speechmaking this year. Putting any other indicator aside, the frequency of Fed speechmaking so far this year suggests conditions are improving.

Of course, the next stage in this exercise would be to take advantage of freedom of information laws to get access to the appointment diaries of all the governors. That would permit us to track what is currently scheduled and, then, how that schedule varies through the year. If the governors thought this was getting out of hand, they might consider setting a firm quota of annual speaking engagements to confound their observers.

(John Robertson is a director of E.I.M. Capital Managers, a Melbourne-based funds management group. He has worked as a policy economist, corporate business strategist and investment market professional for over 30 years after starting his career as a federal treasury economist in Canberra. His daily Market Diary - Brief Thoughts on Current Issues is available at http://www.eimcapital.com.au/PortfolioDirect/daily_views.htm).


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