Why does the Federal Reserve have blackout periods?

The Federal Reserve is about to enter one of its blackout, or quiet, periods. This is approximately 10 days before a Federal Open Market Committee meeting and about a day after when policymakers and staff at the Fed must refrain from speaking about macroeconomic issues or monetary policy with the public. The practice goes back to at least the mid-1980s and was formalized in 2011.

You know when you’re listening to a symphony — say Beethoven’s Fifth, because that’s a crowd pleaser — and then there’s a part where the music gets really quiet, and it kind of gets you amped up for what comes next? The Fed’s blackout period acts a bit like that quiet part of the music.

“Then, all of a sudden, something really big happens. Well, you’ve got the attention when the really big event occurs,” said Peter Conti-Brown, a financial regulation professor at the University of Pennsylvania’s Wharton School.

The really big event he’s talking about is the Fed’s public statement that’s released at the end of each FOMC meeting, which includes whether the Fed is changing the federal funds rate and its reasoning. Those statements are pretty clear. Conti-Brown said any public comments from Fed folks in the days immediately beforehand could muddy that message. 

“When the Fed speaks with a mumble and speaks vaguely, then its ability to accomplish its goals is undermined,” Conti-Brown said. 

This is a striking difference from how central bankers used to communicate. Conti-Brown said until about the ’90s, they didn’t say much about what they were doing, and that was on purpose.

“The saying went that central bankers should never explain, never defend,” Conti-Brown said. “That was not because they were so hoity-toity or above the fray, but because it was better for the country. It was better for the economy if central bankers could preserve their freedom of movement to do whatever they felt was right in the moment.”

But the Fed has since changed how it communicates, Conti-Brown said. 

“They started engaging in more radical transparency and started saying, ‘We’re going to speak much more clearly, and use that clarity as our tool,’” Conti-Brown said.

Blackout periods also act as an anti-corruption measure to keep people from profiting off of any information leaks, he said. 

“With minimal effort, you can make money if you know where the price is going to be,” said Conti-Brown. “And if you had that inside dope, you wouldn’t have to guess, you would know.”

Also, in the week leading up to the FOMC meeting, the policymakers at the Fed need their colleagues to keep quiet publicly because they’re talking a lot privately.

“There’s a lot of very intense policymaking going on,” said Don Kohn, a member of the FOMC from 2002 to 2010. Overall, he worked for the Federal Reserve system in different roles for 40 years. He’s now at the Brookings Institution.

Kohn said before each meeting, there’s a lot of consensus building going on. Policymakers are figuring out not just what they’re going to say, but how they’ll say it. 

“So in that very intense period, you want to really be sure that you don’t have a leak or a hint, even an inadvertent one, that would spark market speculation and that would interfere with this process,” Kohn said.

Blackout periods helped him, he said. 

“I didn’t have to worry that someone was going to start hinting to the press that the committee might do X or Y, which would then provoke some market reaction, which then I would have to take account of,” he said. 

Kohn said there was already a lot of information to digest, and the blackout period helped him focus on the task at hand. After the meeting, he said individual members keep quiet, so it’s just the committee’s message that’s out there shaping the public’s perception.

“Only after that’s sunk in, and the committee has a chance to speak as a committee, can individuals put their own spin on what happened, or their own projections of what’s going to happen in the future,” he said.

So, you can think of those Fed policymakers as being kind of like musicians. In order to make the symphony sound good, they should only play when they’re supposed to.