Lifting the veil of secrecy from monetary policy: evidence from the Fed's early discount rate policy

Traditionally, monetary policy has been conducted under a veil of secrecy. In its landmark Freedom of Information Act case, the Federal Reserve argued that it needed to delay the disclosure of its policy decision, claiming that immediate disclosure would cause the market to overreact or react in a way that was inconsistent with the Fed's intentions. Based on this argument and others, the Fed was permitted to delay the release of FOMC policy decisions. Contrary to the Fed's assertion, most economists believe that market forces would work to keep equilibrium outcomes more in line with policy maker's intentions if policy makers would announce their intentions and establish a reputation for behaving in a manner consistent with them. This paper tests the hypothesis that the market responds more closely to the Fed's intentions when the Fed makes its intentions known by investigating the market's reaction to a change in discount rate policy in the 1960s. We find that the market responded in a manner inconsistent with the Fed's intentions when they were unknown, and responds in a manner consistent with them when the Fed made its intentions known.