A history of the asymmetric policy directive

T Federal Open Market Committee (FOMC) is the Federal Reserve System’s principal monetary policy-making committee.1 At the conclusion of each FOMC meeting, the Committee issues operating instructions, known as the “directive,” to the Open Market Trading Desk at the Federal Reserve Bank of New York. From 1983 through 1999, these instructions included a statement about the Committee’s expectations for future changes in the stance of monetary policy, in addition to instructions for current policy. The statement pertaining to possible future policy was known as the “symmetry,” “tilt,” or “bias,” of the policy directive. The directive was said to be symmetric if it indicated that a tightening or an easing of policy were equally likely in the future. Otherwise, the directive was said to be asymmetric toward either tightening or easing. Since February 1994, the FOMC has publicly announced changes in current monetary policy immediately upon making them. Before May 1999, public announcements made at the conclusion of FOMC meetings did not indicate whether the FOMC had issued an asymmetric directive. From May to December 1999, however, announcements following FOMC meetings included a statement of the Committee’s expectation about the direction of future policy action, regardless of whether an action was taken at that meeting. This practice attracted considerable attention and much speculation about how to interpret statements about possible future policy changes. The Fed has never provided an official interpretation of these statements. To help clarify its intentions, the FOMC established a subcommittee to review both its policy directive and the public announcement following FOMC meetings. In January 2000, the FOMC announced that the public statement issued at the conclusion of future FOMC meetings will indicate any immediate change in the stance of policy, as well as the Committee’s assessment of the balance of risks between heightened inflation pressure and economic weakness over the foreseeable future. The new language, however, is not intended to indicate the likely direction or the timing of future policy moves. The January 2000 announcement appears to bring to a close a distinct period in the history of Federal Reserve operating procedures. This article will review the history and implementation of asymmetry in FOMC policy directives between 1983 and 1999. Researchers and market participants have suggested at least three interpretations of the FOMC’s use of asymmetric language. One is based on the belief that the FOMC chairman has discretion to adjust the stance of policy by small amounts between FOMC meetings without consulting the full Committee. An asymmetric directive, according to this interpretation, granted the chairman authority to make larger intermeeting policy changes in the direction specified by the asymmetric language than he otherwise was permitted to make. A second interpretation holds that the issuance of an asymmetric directive indicated that the FOMC was more likely to change the stance of policy either before or at the next FOMC meeting, than if a symmetric directive had been issued. Asymmetric language also is thought to have indicated the most likely direction of the policy action. Some observers interpret asymmetry as pertaining just to the intermeeting period, while others contend that asymmetry signaled likely changes in policy at the next FOMC meeting. Before 1994, the FOMC often changed its policy stance between meetings. Since 1994, however, it has rarely done so, suggesting a possible change in the horizon over which asymmetric language pertained. A third interpretation is that asymmetric directives primarily were used to build consensus among the voting FOMC members. For example, if several members of the Committee desired to tighten policy