The World Listens To the Silent Dog

WHEN Federal Reserve policymakers decided not to change interest rates Tuesday, it was like the dog that didn't bark in the Sherlock Holmes mystery; the no-noise decision was significant.

The news media, ready for whatever the Fed decided, quickly spread the word. Bond and stock prices fell. So did the United States dollar in relation to the German mark and Japanese yen.

Investors often lose or make money on Fed news. Interest rates quickly affect sales of housing, autos, and durable goods, and, after a lag, the pace of overall economic activity. Further, the level of interest rates has an impact on the distribution of income. If the Fed had raised rates again Tuesday, creditors would have benefited, debtors would have been hurt.

When the Fed started raising short-term interest rates a year ago, it initiated a policy of announcing such decisions right after its Open Market Committee (FOMC) meetings in Washington. It previously waited five weeks -- though any action was usually detected quickly by Fed watchers on Wall Street.

So far, Wall Street observers see none of the financial harm feared by the Fed from the new quick disclosure policy.

With about 10 FOMC meetings since the policy change, a pattern has developed. The Fed feeds its news to the financial wires and the wires pass it on to the financial community. This week, a Fed official phoned a two-sentence announcement to the press room at the Treasury several blocks away. If the news had been longer, it would have been faxed over. The six or so news-service journalists there agree on a news deadline, usually two to five minutes later, and out the news goes.

Central banks, because of their economic importance, make news around the world. Yesterday, the policymaking body of the Bundesbank, Germany's central bank, met and unexpectedly lowered interest rates -- a news event followed closely not only in Europe but also in New York. In mid-March, China's parliament passed a law, the first, governing its central bank. About a third of the deputies complained that it failed to guarantee sufficient autonomy to the bank. Legislative changes for the Banque de France, giving it greater independence from the government, went into effect in January 1994. In Britain, the position of the Bank of England has been strengthened by the establishment of a new relationship between the chancellor of the exchequer and the bank. Minutes of the meetings between the governor of the bank and the chancellor are made public.

In one week, European Union finance ministers will meet in Versailles, France, to discuss again setting up a European central bank and how much independence to give it. Germany wants it like the Bundesbank, responsible only to the public as a whole and not to the government.

In the last few years, academic economists have written paper after paper exploring the merit of independence for central banks -- usually advocating an undemocratic institution within a democracy. These academics can and are influencing real-world developments. The nations of the fomer Soviet Union and the Eastern bloc are being advised that when they create either a new central bank or consider reforms of old communist-style central banks, to give these institutions great independence. That's because the academic research has found a correlation between greater central bank independence and low inflation.

Russia, seen as a worst case, suffered extreme inflation because its central bank and its chairman, Victor Gerashchenko, were beholden to parliamentary interests that successfully demanded far too much credit. But last year the bank got more power and a new acting chairwoman, Tatyana Paramonova. A female central bank head is a rarity. So far she has slowed credit creation from the inflationary pace of her predecessor.

But Adam Posen, an economist at the Federal Reserve Bank of New York, warns that central bank independence alone isn't sufficient to ensure an anti-inflationary monetary policy. Central bankers know that governments may limit their independence if that policy causes too much economic hardship. So, his research shows central bankers with political backing from the financial markets, especially the bond market, are more able to withstand political pressure aimed at weakening tough monetary policy.