FEDWATCH-Full openness may solve Catch-22 for Fed
By Isabelle Clary
NEW YORK, Aug 23 (Reuters) - The Federal Reserve is widely expect to raise short-term U.S. interest rates on Tuesday but could surprise markets by announcing it will disclose its future policy intentions at all times instead of once in a while.
The Fed would thus resolve a ''Catch-22'' it created for itself -- a ''damned if you do, damned if you don't'' situation -- when it announced in February it will spell out its policy intentions, but only sometimes.
The ''Catch-22,'' named after the 1960s novel by New York writer Joseph Heller, describes a paradox where the solution to the problem is contained within the problem itself.
The regular disclosure of policy intention would be included in a statement that the Fed would issue after each meeting -- and not only when it changes rates.
Announcing policy intentions on a selective basis added more confusion to financial markets, because they were left wondering whether such revelation was a guarantee of the next policy stance.
WHAT THE FED SAID IT WOULD DISCLOSE
The Federal Open Market Committee (FOMC) said in the minutes of its December 1998 meeting, released in early February, that it will announce its policy outlook ''when the stance of monetary policy remained unchanged,'' and ''when it seemed important for the public to be aware of an important shift in the (FOMC) members' views.''
The FOMC did just that in May when it left the federal funds rate for overnight interbank lending unchanged at 4.75 percent but announced it ''adopted a directive that is tilted toward the possibility of a firming in the stance of monetary policy.''
That stance -- tilted toward higher interest rates -- is called in fedspeak a ''tightening bias.''
The Fed raised the funds rate by one-quarter point to 5.00 percent at its ensuing meeting on June 30.
CONFUSION AND CLARIFICATION
Also at its June meeting, the Fed announced it ''has chosen to adopt a directive that includes no predilection about near-term policy action,'' or that it is reverting to a neutral stance for its immediate policy outlook.
Due to the February announcement about announcing ''important shifts,'' financial markets took news that the Fed had no preconceived policy leaning in late June as meaning ''no more rate hike.''
Fed Chairman Alan Greenspan dispelled such market conception during his mid-July Humphrey-Hawkins testimony before Congress, saying he will not hesitate to raise rates at the first whiff of inflation.
Financial markets now widely expect another quarter-point funds rate hike on Tuesday which would be the first back-to-back tightening move in five years.
RESOLVING THE CATCH-22
The increased disclosure issue was already on monetary policymakers's mind throughout 1998, as reported in the minutes of Fed Board meetings that the Fed releases once a year.
One reason why the Fed decided to announce its policy intentions once in a while is because this represented a compromise between those who thought more disclosure would help financial markets and those who feared this would restrict the policy process.
But the always-cautious Fed left a door opened for itself in case the partial-disclosure policy would backfire, saying "on the basis of experience with such announcements, the (FOMC) Committee would evaluate later whether further changes in its approach to disclosures would be desirable.
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