WASHINGTON In June 2003, when the U.S. Federal Reserve was wrestling with how to boost the economy and ward off the threat of deflation, the advice from Chairman Alan Greenspan was to be vague about possible policy steps.
According to transcripts released on Wednesday, then-Fed Governor Ben Bernanke's response was that financial markets needed more information from the central bank, not less.
The transcripts shed some light on Bernanke's approach to today's financial crisis, and highlight a key difference in the current and former Fed chairmen's thinking on communicating when investors were hanging on their every word. (here)
The U.S. central bank releases minutes from its policy meetings, held eight times a year, three weeks after each gathering, but transcripts follow more than five years later.
The transcript from the June 2003 meeting shows Kansas City Federal Reserve Bank President Thomas Hoenig was concerned that questions would arise over how the Fed planned to proceed if already low interest rates fell to 0.75 percent or below.
"My suggestion is that, if you get asked those questions, just say we're examining nontraditional methods and there are many different ways in which we can address the issue," Greenspan replied. "I would be as nonspecific as you know how to be."
While Greenspan said it was important to explain that the Fed would still have room to maneuver even when rates were approaching zero, "as for what that means beyond that, I would be very vague.
"The major reason is that I don't think we will know until we start to address the issue," Greenspan said.
But Bernanke, who succeeded Greenspan as chairman in February 2006, countered that the Fed would be much more successful in achieving its goals if investors understood what it was trying to do.
"Ambiguity has its uses but mostly in noncooperative games like poker," he said. "Monetary policy is a cooperative game. The whole point is to get financial markets on our side and for them to do some of our work for us. In an environment of low inflation and low interest rates, we need to seek ever greater clarity of communication to the markets and to the public."
In 2003, like now, the Fed was concerned about how to prevent a dangerous downward spiral in prices when there was little room left to lower its benchmark interest rate.
Bernanke's views on deflation were already well known by then. He had delivered what became his famous "helicopter" speech the year before, in which he quoted economist Milton Friedman in suggesting that the central bank could combat deflation by printing money and dropping it from helicopters.
The nickname "Helicopter Ben" has stuck, and the reference came up frequently when Bernanke began ballooning the Fed's balance sheet in 2008 in an effort to restore normal lending. However, deflation concerns are still running high.
Bernanke also appears to be acting on his 2003 views on Fed communication. In March, he took the unusual step of granting a prime-time television interview to try to explain why the Fed was pouring hundreds of billions of dollars into the economy. He has also considered holding news conferences.
The 2003 transcripts show that Bernanke was concerned about sending clear signals to financial markets when economic cycles were turning and monetary policy was likely to shift.
He said the Fed may have triggered "unnecessary anxiety among the less sophisticated and ... skepticism about the Fed's seriousness among the more sophisticated" in May 2003 when it hinted at concerns about deflation in the closely watched statement released after its policy-setting meeting.
"I expect that the need to make our public statements more precise and less ad hoc will ultimately lead to the introduction of some elements of quantification," he said.
In 2003, he also advocated releasing the Fed's own internal forecasts for economic growth, inflation and unemployment more regularly, another practice he has put in place as chairman.
(Editing by Chizu Nomiyama)