In an athletic competition, one team attempts to "read" the upcoming plays of the other team. In fact, it's probably fair to say that the athlete's ability to read the next move of an opponent gives him or her a distinct advantage in deciding what actions to take. Similarly, the financial community and the public at large keep a close watch on the Fed and attempt to read the Fed's monetary policy actions. Unlike a competing team, however, the Fed has taken steps to provide signals which are more easily understandable for economic spectators.
In February 1994, the Fed began the practice of announcing changes in its target for the federal funds rate immediately after making them. Furthermore, in 2000, the Federal Open Market Committee (FOMC) began issuing an accompanying statement indicating whether it viewed impending economic risks as inflationary, balanced or tending toward a weakening economy. For example, after its December 2000 meeting, the FOMC announced that it changed its balance of risk statement from "The risks are weighted mainly toward conditions that may generate heightened inflation" to "The risks are weighted mainly toward conditions that may generate economic weakness." This announcement policy provides a signal that is immediately communicated to the public and draws a quick reaction from the financial community.
Also beginning in 1994, the FOMC started the practice of announcing its policy decision. In addition, since then it has followed the practice of making changes in the federal funds rate target primarily at regularly scheduled meetings. Since February 1994, 19 of the 23 changes in the federal funds rate target have been made at regularly scheduled FOMC meetings. Prior to this, however, changes in the target were often made between regularly scheduled meetings. For example, of the 55 changes in the federal funds rate target between 1987 and 1994, only seven occurred at regularly scheduled meetings of the FOMC, and 48 were made during intermeeting periods. An addition—though perhaps less obvious—procedural change also occurred in 1994. Previously, the Chairman frequently exercised his discretion to adjust the federal funds rate target during intermeeting periods without formally consulting with other members of the FOMC. In fact, all 48 intermeeting target changes made during the '87 to '94 period were made at the Chairman's discretion. Current practice for making intermeeting adjustments to the intended federal funds rate suggests that "the Chairman, if feasible, will consult with the Committee before making any adjustments."1 Although the Chairman of the FOMC is authorized "to adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate," clearly the intent of this policy suggests that the Chairman will consult with the committee before changing the target.2 It is not surprising that all four of the target changes made since 1994 that did not occur at regularly scheduled meetings followed a teleconference.
In order to correctly forecast Fed actions, the markets must forecast both the magnitude and timing of changes in the funds rate target. Since late 1989, the Fed has changed the funds rate target by multiples of 25 basis points, or 1/4 of a percent.
Of the 44 changes in the intended funds rate since October 1989, all but one (the 75 basis-point increase on Nov. 15, 1994) have been either 25 or 50 basis points.
By changing its announcement policy, making decisions primarily at regularly scheduled meetings and maintaining consistency in the magnitude of funds rate target changes, the FOMC has made the "Fed playbook" easier to read. So the next time you want to know what the Fed is doing, take a look at the playbook.
This article was adapted from "The Codification of an FOMC Procedure" and "What Accounts for the Reduced Frequency of Fed Actions?" which were written by Daniel L. Thornton and appeared in the March and April 2001 issues of Monetary Trends, a St. Louis Fed publication.
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