The always excellent "The Big Picture" today leads with a column tagged "Lots of jawboning out of the Fed these days." I find this both interesting, and alarming. The issue of central bank transparency is not even remotely new, of course. The trend in the last decade has been to more openness which, in the context of a free economy, seems the course most aligned with market philosophies. (It is maybe no accident that Alan Greenspan is an Ayn Rand disciple and used to be a jazz saxophonist). That pronouncements by any Fed Chairman can move markets is not new. But caution is the better part of valor in this context, I think.
The grip with which the markets held the collective armrests of the movie theater chairs when Greenspan assumed the podium, however, is a more recent phenomenon. So much so, in fact, that one can find substantial research measuring the impact of the former Chairman's pronouncements (and even the anticipation thereof) on the market. My favorite recent work in this field is Chirinko, Curran, "Greenspan Shrugs. Formal Pronouncements, Bond Market Volatility, and Central Bank Communication," January 2006 (183k .pdf) which, in summary, notes "the possibility that one or more aspects of [the Chairman's scheduled public statements] may be counterproductive."
What worries me, however, is that on the heels of a highly respected (even worshiped) Chairman, the incoming "younger brother" might be subject to overcompensation. Bernanke has already fallen into the deadly trap of taking sides on spending and tax cuts when asked.
Part of Greenspan's charm was his inscrutability. His pronouncements were delivered with such measure and pace that even a hint of bias was seized upon by the market. Fed watchers once spent untold hours examining photos of Greenspan's briefcase as he walked into Open Market Committee meetings, the idea being that a full briefcase meant he had brought substantial supporting materials to support a target hike. CNN's Eyes on the Fed even used to run pictures of Greenspan and the case on his way into and out of the meetings. I heard a rumor that it was a clever "Fed Watcher" who put together this little correlation and that once Greenspan found out about it he would deliberately load his case with the same quantity of irrelevant papers before entering the building. As with everything Greenspan, the truth is probably unknowable (until the Memoirs are published- I can't wait).
All this is a way of saying that I think a Fed Chairman needs to be a
bit of a showman. Flirtatious. Hard to get. Coy. Would we have the words "irrational
exuberance" if Alan "If you think you understood me, it's because I
misspoke" Greenspan was constantly holding court? Would Greenspan's
memoirs fetch something like $9 million if he hadn't been an
inscrutable enigma for so long? I don't know. (He never returns my calls anymore).
