Dec. 15 (Bloomberg) -- The Federal Reserve may change its monetary policy statements as early as February, acting on the suggestions of a working group on communication policy formed two months ago, economists said. Federal Reserve Board Vice Chairman Roger Ferguson Jr. is chairing the new group, which has taken on the task of coming up with ``specific proposals'' for changes in the way the U.S. central bank describes its policies, according to minutes of the Fed's October 28 meeting. A Fed spokesman confirmed the working group's participants separately.
The Fed may reveal changes in the language of its post- meeting statements when Fed Chairman Alan Greenspan delivers his semi-annual monetary policy report to Congress in February, economists said. That would enable the group to first report on its work at the next meeting of the Fed's Open Market Committee, Jan. 27-28. ``You have to think that they would like to discuss it in the context of the two-day meeting in January,'' said Lou Crandall, chief economist at Wrightson ICAP. Members of the Open Market Committee, which sets the level of interest rates, have engaged in an open debate about communication policy for the past year with little agreement emerging from a wide range of suggestions.
Investor Confusion
The discussion, and changes this year to the wording of Fed statements, produced confusion in the financial markets and an intense focus on terms such as ``considerable period,'' a phrase the Fed has used after every meeting since August to describe its policy outlook. Long-term interest rates soared after the Fed cut interest rates by a less-than-expected quarter-percentage point in June, following confusion in the bond markets about the degree of the Fed's concerns about disinflationary trends in the U.S. economy and their desired level for price increases. ``They have had some very obvious problems communicating with the markets this year,'' said Michael Prell, the Fed's former director of research and statistics and now an adviser to Deutsche Bank Securities Inc. ``It is also apparent that within the Fed there is some disagreement about where they should go.'' Federal Reserve Governor Ben Bernanke has suggested that the U.S. central bank should declare a numerical inflation goal, while Fed governor Donald Kohn has said such moves would limit the central bank's flexibility. Fed governor Edward Gramlich supports an intermediate approach of declaring a ``preferred long- run range'' for inflation.
Balance of Risks
All three governors are on the communications committee along with Fed bank presidents Michael Moskow of Chicago, Gary Stern of Minneapolis, and Robert Parry of San Francisco. A Federal Reserve spokesman said the committee has begun to work and declined further comment. The Fed said ``changing circumstances required adaptations in the committee's communications,'' in the October Fed meeting minutes which disclosed the formation of the working group. Ferguson chaired the last working group formed in August 1999. In January 2000, the Fed announced that its statements issued immediately after every meeting would describe its assessment of the risks to long-run growth. The so-called balance-of-risks statement was intended to diminish the market's focus on near-term rate adjustments. Prior to 2000, the Fed described its outlook in vague terms, sometimes using words such as ``symmetrical'' to describe its view of the risks between higher inflation and slowing economic growth.
`Considerable Period'
In May, the central bankers split their assessment of prospects for growth and inflation, and suggested disinflation was their primary concern. In August, Open Market Committee members first suggested ``policy accommodation can be maintained for a considerable period,'' and investors began watching for its removal as an indication that the Fed might soon raise interest rates. Last week, Fed officials kept that phrase, but said the risks of inflation and deflation are now roughly equal. ``Part of the problem is that they still don't know what they are trying to say,'' Crandall said. Another indication of the need for change occurred Thursday, when the Fed released the minutes from the October meeting, analysts said.
Minutes Trump Policy
Members said that ``economic performance in line with their expectations would not entirely eliminate currently large margins of unemployed labor and other resources until perhaps the latter part of 2005 or even later,'' according to the minutes of the meeting. That statement had more impact on long-term bond yields than the Fed's decision two days earlier to hold the overnight lending rate unchanged at a 45-year low of 1 percent and maintain the phrase ``considerable period'' at the conclusion of the Dec. 9 FOMC meeting. Yields on the 4 1/4 Treasury note due 2013 settled at 4.35 the day of the FOMC meeting; at the end of the day on Dec. 11, when the minutes were announced, they settled at 4.23 percent.
``The previous view trumped the current view,'' said Prell. ``One would have to ask the question whether or not this was another argument for a quicker release of the minutes.'' Fed minutes are released about six weeks after meetings are held. //www.bloomberg.com