Bernanke's Legacy: Loose Policy and Loose Lips

How press conferences and longer Fed statements have boosted the economy.

Federal Reserve Board Chairman Ben Bernanke testifies before the Senate July 17, 2012, on Capitol Hill in Washington, D.C.
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Ben Bernanke started his tenure at the Federal Reserve by talking too much. Shortly after his 2006 confirmation, Bernanke told CNBC's Maria Bartiromo in a casual conversation at the White House Correspondents' Dinner that he thought markets had misinterpreted his recent congressional testimony. When Bartiromo reported the news, stocks fell, and Bernanke admitted his mistake.

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It's an ironic story in retrospect. Though Bernanke once made the mistake of talking too much, his legacy now will be that he helped usher in the era of a more talkative central bank – a policy that may well have helped bolster the economic recovery.

Fed communications had gradually loosened in the years preceding Bernanke, but during his tenure, the communication makeover has been rapid. Statements from the Federal Open Market Committee, the arm of the bank that sets monetary policy, have gradually grown far longer than in the Alan Greenspan era – in the early 2000s, statements after FOMC meetings were often just a few hundred words, if that. In contrast, the FOMC's latest statement is nearly 870 words long. As chairman, Greenspan famously joked about the Fed's inscrutability, at one point telling reporters, "If I seem unduly clear to you, you must have misunderstood what I said."

The committee in 2007 also started releasing three-year numerical economic forecasts, and Bernanke in 2011 started giving press conferences after some committee meetings. Then, in 2012, the committee announced jobless- and inflation-rate thresholds for when it again might raise interest rates – an effort to telegraph what could be ahead in Fed policy.

At the central bank's 100th birthday on Monday, Bernanke stressed the importance of communication.

"Ultimately, the legitimacy of our policies rests on the understanding and support of the broader American public, whose interests we are working to serve," he said.

Though openness may sound like an inherently positive notion in a democratic society, Bernanke's aim has been far more than transparency for transparency's sake, economists say. Giving more information on the Fed's actions has been a way of providing stability during a time of economic instability.

"I think they're helping [by talking more], particularly because what we're seeing is a lot of uncertainty about some very long-term issues and problems," says Gary Thayer, chief macro strategist at Wells Fargo Advisors. "The economy is going through a very slow recovery that's taking a lot longer than is historically normal. Therefore I think the Fed has to be more open about its longer-term strategies to deal with that."

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Additional information became particularly important as the Fed undertook the new, little-tested policy of quantitative easing, another analyst says. Making sure the central bank talked plenty about what it was doing through the policy's massive asset purchases helped make the effort more effective.

"When short-term interest rates reach what the Fed would call the 'zero bound,' the opportunities for traditional monetary policy go out the window," says Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC. "One way that the Fed has used nontraditional policy is by issuing promises. That's really at the heart of the communication strategy."

In this way, Bernanke's communication strategy could rank as a groundbreaking policy, alongside quantitative easing.

"Bernanke is really a great experimenter in monetary policy in a time when experiments were necessary," LeBas says. Three rounds of easing have helped balloon the Fed's balance sheet from under $900 million in 2008 to $4 trillion.

Particularly with the open-ended monthly asset buys during the Fed's third round of quantitative easing (often referred to as "QE3"), the extra communication has been aimed at calming markets that were constantly straining for information on when the Fed might taper those purchases. Adding extra "oomph" with market shocks was partially the point of tight-lipped policy in the past, whereas now the Fed has been trying to keep the markets and the central bank on the same page.