Understanding an FOMC Statement

Well, good afternoon and welcome to this session of Feducation. It’s great to have all of you here. And we hope you find this session really interesting today. We’re talking about “What’s behind the FOMC Statement” today.

My name is Mary Suiter, and I’m the assistant vice president responsible for economic education for the Federal Reserve Bank of St. Louis. Feducation was developed to provide economic content and to equip people with a better understanding of the Federal Reserve and its policy actions.

And our objectives are to identify changes in the FOMC Statement overtime and identify or explain how changing the FOMC statement reflects changing communication strategies for the Federal Reserve.

The FOMC, or Federal Open Market Committee, meets regularly throughout the year to review economic and financial conditions, and to make decisions regarding interest rates and the nation’s money supply.

I started by distributing packets of previous FOMC statements from 1994 through 2013, and asked audience members to attempt to place these statements in chronological order (from oldest to newest).

After completing this task, we reviewed the actual order of the statements and discussed how they changed over time. Participants noted that the statements became longer over time, and that readability became more complex.

Ok, now I ran the reading level on these and, you know, did a grade level reading and actually the reading level has gotten more difficult over time, because of the number of sentences, length of the sentences and the sum of the words.

What about transparency? Is it more clear what the Fed is doing? Are we being more transparent about what we’re doing, why we’re doing it?

Participants had mixed thoughts. Yes, the Fed is a great deal more transparent, however, there’s a lot more description, and the description is more complex and unfamiliar. This makes it more difficult to understand.

They always choose a twenty-five dollar word at the expense of a fifty-cent word any time they can. Which I think reduces transparency, but in general we are saying more about what we do.

What about transmission of policy? What happened over time?

While participants agreed that the statements are more complex, they also understand that the intent of the FOMC is to communicate more information. And indeed, participants thought that the FOMC was communicating more about what they were going to do next and how long that policy might stay in place.

So you see a lot of transition there in how we’re reporting and what we’re reporting and perhaps some of the whys of that. One of our economists did an average word count of the FOMC statements over time. So, 99 words in 1994, 645 words in that latest one. So, many, many more words. A lot of that contributes to the clarity and understanding of those of us reading those statements.

Recognizing that the length and complexity of the statements has increased with the complexity of monetary policy, we worked with participants to help them understand the new format of the FOMC statements.

As an example, we looked at the March 20th, 2013 statement. The first and second sections provide an overview of current economic conditions. They’re describing what’s happening in the economy and providing information on the economic outlook in the context of the Fed’s dual mandate of economic growth and full employment.

In the third section the statement offers language pertaining to special operations, like operation twist or one of the quantitative easing issues.

The fourth section is the status of current policy actions in the context of the economic outlook. So what the Fed is doing and why.

In the fifth section the statement provides forward-looking language to tell us what they’re going to do, how long they’re going to do it, and why they’re doing it.

The sixth section is the vote on the directive. If you look at the very early FOMC statements, you’ll realize there was no vote on the directive; they just say the chairman said this.

To summarize: over time FOMC statements have become longer and more complex. However, these longer statements provide information about current economic conditions, special operations, current policy, what the Fed is planning to do, why they are pursuing the action, and how members of the FOMC voted relative to the directive.

We hope this session helps you better understand what’s behind an FOMC statement. For more Feducation episodes or more educational videos visit stlouisfed.org.