The Federal Reserve Board building in Washington, D.C.Mark Wilson
Anyone who thinks central bankers all see the world the same way hasn't been watching the Federal Reserve lately.
The U.S. central bank is afire, as the PhD economists who populate the place engage in a make-or-break debate about whether the recovery is stable or dying in front of their eyes. The remarkable thing, especially from a Canadian perspective, is that Fed chairman Ben Bernanke apparently is comfortable putting the Fed's internal uncertainty on display for all to see.
Mr. Bernanke and the rest of the policy-setting Federal Open Market Committee (FOMC) tested investors' tolerance for dissent at the central bank some more on Tuesday, with the release of the minutes of the Aug. 10 meeting.
The synopsis of the discussion, which resulted in the Fed opting to backtrack on plans to tighten lending conditions, presents a choir that is rather out of tune. In the end, nine of 10 policy makers voted to resume limited purchases of financial assets to keep downward pressure on interest rates. But it was a strained consensus amid disagreements about everything from the risk of deflation to whether the reinvesting the proceeds of expiring mortgage securities would have any impact on the economy.
The dissent, recorded at the Aug. 10 session by the committee's secretary, William English, made official what investors and economists already knew. For weeks, several of the regional Fed presidents who participate in policy discussions have been airing their disparate views in speeches, television appearances and interviews, raising questions about whether the Fed could do with a little less transparency.
With the U.S. benchmark interest rate near zero, the back-and-forth within the FOMC is an honest reflection that monetary policy is in uncharted waters. The risk is that where experts see a healthy discussion, the general public sees a captain and his mates fighting about where to steer the ship, exacerbating already weak consumer and business confidence.
"It's open and honest, but I worry that by heading off in all kinds of different directions they might be confusing the public," said Angelo Melino, an economics professor at the University of Toronto who specializes in monetary policy.
"I'm a teacher, and one the best lessons I got early in my career was from a colleague who told me that one of the most important decisions I would make was what to keep off the reading list," he added.
The Fed struggled with messaging at the Aug. 10 meeting. "A few members," according to the minutes, "worried that reinvesting principal from agency debt and (mortgage-backed securities) could send an inappropriate signal to investors about the committee's readiness to resume large-scale asset purchases."
As it turned out, financial markets slumped in the days after the Fed decision, a puzzle to some given that the Fed had put itself back in a position to provide stimulus. But many analysts interpreted the shift as evidence that the U.S. economy was in worse shape than the Fed was letting on. Minneapolis Fed president Narayana Kocherlakota, a non-voting participant in the Aug. 10 meeting, said the market reaction to the FOMC decision was unwarranted.
Later, The Wall Street Journal reported that at least seven of 17 Fed officials argued against the decision to reinvest the principal on mortgage securities in longer-term debt before Mr. Bernanke eventually got all but one - Kansas City Fed president Thomas Hoenig, who has opposed every Fed decision this year - to coalesce around the shift to a more neutral stance.
"Historically, if you are having a problem communicating, and there are leaks, it is because people don't agree," Vincent Reinhart, a scholar at the Washington-based American Enterprise Institute and a former Fed economist, said on a conference call with reporters this week. "There's an arm's race aspect to it," Mr. Reinhart said, as officials, under the cloak of anonymity, take advantage of the situation to push their points of view.
When the Fed sang in unison the economy was growing at an annual pace of around 3 per cent - all policy makers had to do was adjust the benchmark interest rate. The Fed retains tools to guide the economy, but they are untested. Pretending otherwise could be as big a risk as sending confusing signals by creating a false sense of security.
"If there is no agreed-upon policy, you have to accept there will be uncertainty in the markets and volatility," said Kevin Logan, chief U.S. economist at HSBC in New York.
The Fed's public search for answers about what to do next wouldn't happen in Canada.
Unlike the FOMC, which is made up of the Washington-based members of the Federal Reserve board and a rotation of five of the 12 regional Fed presidents, the Bank of Canada's Governing Council has no statutory power to set policy, which ultimately rests with the governor. The result is a rigorous commitment to a consensus view from which only Governor Mark Carney can deviate.
"If there is discord, it is very silent," said Sheryl King, head of Canadian economics at Bank of America-Merrill Lynch in Toronto and a former economist at the Bank of Canada. "In the end, it's Mark Carney's call."