The Federal Reserve will make history Wednesday by holding a press conference after one of its policy meetings – a step that could help the Fed attract more public support even as it brings public-relations risks.
By moving to take news-media questions at least four times a year, the Fed is joining central banks in Europe and elsewhere in becoming more open to public scrutiny. And it comes at a sensitive moment, with internal debate within the Fed's policy committee about whether it's time to begin pulling back from extraordinary efforts to stimulate the economy.
For Mr. Bernanke, it's an opportunity to seek greater public trust in an institution that has long been viewed as secretive, aligned with Wall Street, and prone to human policy errors. To some financial experts, the Fed played a crucial role in lifting the economy out of financial crisis since 2008. But to many Americans, the crisis and ensuing rescue efforts only reinforced doubts about the nation's central bank.
The risk, of course, is that the press briefing provides unscripted moments during which the Fed chairman could stumble, appear uneasy, or send mixed signals. The Fed has long used carefully crafted written statements as its primary means of communicating on policy.
"It makes great sense ... [but] there's the potential here to create some problems," says Kenneth Thomas, a Fed expert who lectures at the University of Pennsylvania's Wharton School. "It's all in the execution."
How to convey thinking of a committee
One danger is that it's hard for one person to convey the thinking of a committee. For instance, if some Fed officials feel that Bernanke fails to give adequate play to inflation risks, they may feel impelled to speak out publicly on their own in subsequent days, Mr. Thomas says. The result could be that the new openness adds to financial market uncertainty.
The Fed clearly believes the benefits outweigh such risks.
With unemployment still high, prices for gas and food on the rise, and the memory of Wall Street bailouts still fresh, the Fed is scrambling to regain respect and fend off the threat of potential congressional constraints on its power over monetary policy.
To a large degree, too, the move toward transparency is simply a continuation of a trend that dates back to the 1990s, when the Fed began making available written records of its policy decisions.
The Fed chairman has long answered questions from elected lawmakers during semiannual appearances on Capitol Hill, but the press conference will be different. For one thing, although members of Congress sometimes ask the same questions a reporter would, often they are more interested in expounding on their own views or seeking comment on a narrow legislative issue.
New policy statement
What's also new is that Chairman Bernanke will be getting questions on the same day the Fed issues a new policy statement. The formal statement will be released at 12:30 p.m. (versus 2:15 traditionally), so investors will digest the committee's statement itself before Bernanke speaks.
The Fed may signal that it is close to ending the so-called "QE2" policy, its second round of "quantitative easing" of monetary policy since the financial crisis. This policy has aimed to stimulate the economy by buying Treasury debt, to put downward pressure on interest rates and upward pressure on the prices of other assets such as stocks.
Critics say the policy is fanning inflation without doing much for jobs.