Openness casket

Fed's glasnost era dies, age 9: An obituary

The US Federal Reserve's glasnost era passed away this week. It was nine years old. The central bank's campaign to provide transparent policy guidance finally lost its tough battle with market misinterpretation. Chair Janet Yellen, who helped nurture the effort under her predecessor Ben Bernanke, and other officials revealed the sad news. Its demise leaves investors worldwide bereft.

Recently retired Bernanke fathered the cause after he took the reins on 2005 - although there were rumblings of a more open Fed before that. Traders and investors properly began to take notice of the policy shift after the financial crisis.

The monetary policy committee's post-meeting statements changed from vague prognostications that rates would stay exceptionally low for "some time" to "an extended period" to a more helpful one of until at least "mid-2013." By April 2011, Bernanke was even holding regular periodic press conferences to discuss policy and projections.

The campaign seemed to flourish, with analysts eagerly absorbing information that was higher in both quantity and quality. Tragedy struck last June, however, when Bernanke signalled that the central bank would begin shrinking its bond-buying programme. Investors panicked, driving up rates. He later backtracked.

With the transparency effort now already effectively on life support, another blow came in March. The monetary policy committee dropped a key metric for deciding when to mull a rate hike - that being an unemployment rate of 6.5 per cent.

Outgoing Governor Jeremy Stein effectively announced the death of openness on Tuesday this week. In a speech he warned that the Fed could freak out markets by talking too loudly, but that speaking quietly in an attempt to manage misinterpretation could be self-defeating, as investors could then overreact to even slight tweaks.

Yellen herself made the news official. In Wednesday's Congressional testimony, she essentially argued that a 6.5 per cent jobless target was never real anyway, rather just a way to signal to investors that the Fed wouldn't consider touching rates when joblessness was higher. She also refused to give a strict timetable for raising rates, even if the economy performs precisely as the Fed expects.

It's back, then, to the convoluted, Sphinx-like utterings the likes of Alan Greenspan made famous. Rest in peace, Fed openness.