Today David Greenlaw of Morgan Stanley attempted to explain how the FOMC statement error transpired. Here is the complete article. Following is a synopsis:
On the day of an FOMC meeting, the press room — which is actually located at the Treasury Dept –receives a fax containing the official statement at around 2:10pm (yes, the Fed still uses a fax machine!!!). The statement is subject to a 5 minute embargo. As this lock-up period nears its conclusion, a verbal count down begins — think Times Square on New Year’s Eve — with all press organizations prohibited from transmitting until the count hits zero. (Note: the official US government economic reports, such as employment and CPI, are released in a similar fashion, although the embargo window is longer — usually 30 minutes.)
On Tuesday, the FOMC statement was issued at the usual time. The statement indicated that the fed funds rate target was being hiked by 25 bp to 3%, as anticipated. Moreover, the now familiar “measured” and “accommodative” phrases contained in the official statement were left unaltered. There was a modest negative reaction in the Treasury market (3-5 bp) because some hawkish changes to the description of the inflation environment appeared to outweigh an acknowledgement of the recent soft patch in the economic data. However, that’s not the end of the story.
At 3:50pm, the Fed called the press room and told reporters to disconnect their communication equipment. This prompted widespread confusion among the contingent of reporters still present because the only time the Fed had made such a request in the past was when they were about to announce an inter meeting policy change. A few seconds later, a fax containing a corrected version of the official statement was received and a new 5 minute embargo period commenced. At 3:55pm, the reporters were allowed to transmit the corrected version. The Treasury market rallied back, recouping just about all of the previous losses. Apparently, the following sentence: “Longer-term inflation expectations remain well contained” was inadvertently omitted from the original statement. This is a serious error, because it makes the statement slightly less hawkish than originally believed.
So, how did the error occur? Larry Meyer’s recent book “A Term at the Fed” provided some interesting background on the development of the official statement. When it was initially introduced in 1994, the statement was essentially drafted by Greenspan himself prior to the actual meeting. Over time, the process evolved and we understand that the current practice is to have three alternative versions of the statement prepared ahead of time. At recent meetings, with the fed funds rate outcome a virtual foregone conclusion, much of the policy discussion has appeared to revolve around the choice of wording in the statement. Apparently, agreement on the final language might not be reached until the session was nearly over. Moreover, the last couple of one-day FOMC gatherings for which minutes are available show that the meetings did not adjourn until 1:25pm. This means that there is very limited time to edit, fax and post the text.
That explanation raises more questions than answers. Here are nine such questions and comments:
1) No time left after the meetings huh? Well maybe the problem is too much concern over a few simple words. After all, you have no credibility left anyway (as discussed in A Measured Pace of Fake Transparency) so why put up the façade?
2)Then again, as long as you insist on wordsmithing, why not start your meetings 15 minutes earlier so you can devote extra time to get your text correct? Would an extra 15 minutes be such a hardship out of your busy schedules to make sure the proper text gets issued?
3)Why the outdated FAX procedures?
4) What purpose does a 5 minute delay serve anyone? I mean really. I suppose one can make a case that it gives reporters 5 minutes to write their story but do they need 5 minutes just to issue the text? What hefty journalism can be accomplished in 5 minutes anyway? The statement is the statement. Why not release the news and let the fastest journalists out there find the differences? Worse yet are the 30 minute delays that exponentially increase the odds of a leak somewhere.
5) Having watched futures on these announcements for quite some time, there is no question that some of this info is leaked. I even seem to recall some brokerage houses knowing in advance that the 30 yr bond was going to be pulled a few years back. They claimed they did not act on the info. Yeah right. Even IF so, they sure knew exactly what they were going to do when it was announced, an advantage that no one else had. I guess this comment applies to government reporting in general, not just the FED.
6) Why did it take so long to spot the error anyway? Does anyone spot check these things after they are released or do they wait 90 minutes and then read them?
7) 2:10-3:50 That is one hour 40 minutes by my math. More than enough time to spot the error so why the delay in reporting it? Perhaps I am supposed to believe someone was reading the text an hour and a half later and accidentally noticed it. Sorry, I do not buy that line.
8) After the error was spotted did the FED decide to see what the market reaction would be before deciding to correct it?
9) Was it vital to correct the error when and how it was done?
Somehow I doubt this was ALL perfectly innocent, even if it initially started out as an accidental error. At best the FED and other government reporting agencies have piss poor procedural processes (PPPP) need to be looked at. At worst we have blatantly planned manipulation (BPM). The truth is probably somewhere between those extremes.