WASHINGTON — Until last month, anyone keeping tabs on monetary policy at the Federal Reserve would focus almost entirely on one simple, almost Pavlovian number: the overnight federal funds rate that banks charge each other for lending their reserves.
If the central bank wanted to jump-start the economy with cheaper money, the federal funds rate would inch down. If it wanted to cool down the economy and head off inflation, the rate would inch up. If policy makers wanted to add some color to their thinking, they could drop hints in their statement after each meeting.
But when Fed policy makers finish their two-day meeting on Wednesday, they are likely to be far more opaque about their actions.
Having reduced the benchmark interest rate almost to zero last month, Fed officials are now trying to prop up the economy by pumping out cheap money through at least a half-dozen new programs that are both difficult to explain and difficult for the public to track.
Officials are expected to articulate their broad goals in the short statement that always follows a policy meeting. On Wednesday, they are likely to reiterate that the economy is still in dire trouble, that inflation is still slowing and that they will use “all available tools” to get things moving again. They are also expected to repeat their intention of keeping the federal funds rate at “exceptionally low levels” for “some time.”
Fed officials acknowledge that the new strategy creates communication problems and is likely to make policy-making less transparent. The fast-growing and fast-changing array of new programs are all aimed at reviving a particular segment of lending, from home mortgages to short-term corporate debt to consumer loans and student loans.
But officials have offered little detail on potentially explosive political questions about how much to push down interest rates on mortgages versus municipal bonds or corporate debt.
At the moment, the Fed’s most important new lever is its program to buy up $500 million in mortgage-backed securities that have been guaranteed by the federal government. By buying up those mortgage securities, the central bank will push up their prices and push down their yields, or interest rates. Indeed, the program has already driven down rates on plain-vanilla mortgages to their lowest level in decades.
But the Fed has many other levers with names that are bafflingly easy to confuse: the Term Auction Facility, which provides loans to banks; the Term Asset Backed Securities Loan Facility, a $200 billion program to finance consumer loans; the Commercial Paper Funding Facility, which lends money for short-term business i.o.u.’s.
All of those programs are meant to increase the supply of money, which usually leads to lower borrowing costs for businesses and consumers. Indeed, the Fed has sharply increased the money supply to finance the new programs. Since last September, the central bank has created more than $1 trillion in new money, virtually out of thin air.
“They are trying very hard to be open,” said Bruce Kasman, chief economist at JPMorgan Chase. “But what are the actual things they are doing in the market? What is their intent? How long will they keep these things in place? There is lots of debate going on in the market about that.”
Fed officials acknowledge that the new tactics of monetary policy are likely to be at least somewhat murkier to explain than their traditional decisions about the federal funds rate.
After the central bank’s policy meeting last month, when officials lowered the federal funds rate almost to zero, senior Fed officials held a conference call with reporters to answer questions.
But under the ground rules that Fed officials demanded, the senior officials doing the talking were not allowed to be quoted directly or by name. As a result, their answers were heavily filtered through the prism of reporters without giving members of the public a chance to hear the officials themselves.
Fed officials have toyed with the idea of holding occasional news conferences in front of television cameras. The idea is still anathema to many Fed officials, but it has been standard procedure for the president of the European Central Bank. The E.C.B. normally holds a news conference after every second policy meeting.
Fed officials said they were not even close to that kind of change. But they may be inching in that direction. Ben S. Bernanke, the Fed chairman, has accepted an invitation to speak at the National Press Club in February.
But analysts said the wide range and ever-changing array of Fed programs could put it in the position of making decisions about whether to focus on reducing rates for corporate borrowers, home buyers or some other group.
At the moment, for example, the Fed is buying up hundreds of billions of dollars worth of mortgage-backed securities. If it switched to buying high-grade corporate bonds, it could end up raising rates for home buyers and lowering them for companies like General Electric.
“I don’t think the Fed has even attempted to explain why it has bought mortgage-backed securities and not corporate bonds,” said William Poole, a former president of the Federal Reserve Bank of St. Louis. “Here we have the Fed allocating credit to particular sectors. What are the criteria? There are lots of deserving borrowers out there. Why did the Fed pick these particular ones?”
