James Saft is a Reuters columnist. The opinions expressed are his own.
HUNTSVILLE — Wednesday was a weird day, caught somewhere between being a victory for the paranoid and a genuine step forward for openness and transparency.
And no, I am not talking about the sad spectacle of President Obama trotting out his birth certificate to assuage his deluded doubters. I am instead speaking of the Federal Reserve, which for the first time in its long history has taken the step of actually taking questions from the press after announcing its monetary policy decision.
Unlike the birth nonsense, there are two not mutually exclusive ways you can interpret the Fed’s decision to put itself at the mercy of the hacks. First, it is a real step forward for transparency, a step along the way towards renouncing the cant of the era of Greenspan, who seemed to regard himself as part economist, part Delphic Oracle and part Wizard of Oz. Second, it marks a waning of the power of the Fed, which has been diminished by its poor track record and by steps it took which opened it up to attack.
It is perhaps this second point which is more important; the Fed is under attack, under suspicion and trying very hard to husband its credibility. This is a tough combination of factors, and a state of play that could make it more difficult for the Fed to effectively fight inflation.
The most important weapon of any central bank is its credibility, which amounts to the faith that people have that it will follow its mandates. That’s not simply faith that a bank will do what it says, but belief that it can do what it says. For the Fed, which has a dual mandate to foster employment and keep a lid on inflation, this is sometimes nearly impossible. It may also not be something that is aided by transparency. Fiat money is a system of faith, and as many religions have found, faith and transparency don’t always mix.