In his six years as chairman of the Federal Reserve, Ben Bernanke has stretched the central bank in once-unthinkable ways—pushing short-term interest rates to near zero and keeping them there for years, more than tripling the size of its securities and loan portfolio, rescuing financial firms that the Fed doesn't even regulate.
Lost in the glare of these radical actions is how much he has changed the institution itself. Under his leadership, the Fed has become more open about its plans for the economy and its own sometimes-divisive internal debates. Mr. Bernanke also has made the institution more consensus-oriented even as he assertively pushed the Fed into uncomfortable places. Last week's moves by the Fed were vintage Bernanke in all of these respects and will have long-lasting effects on how the central bank operates.
The Fed took two steps. First, it published detailed interest-rate projections of each of the 17 officials who participate in policy meetings, without identifying the officials by name. Second, it spelled out its goals for inflation and unemployment more explicitly than it has before.
The first step—publicizing the wide-ranging views inside the Fed of where people believe interest rates should go—effectively gives voice to the larger committee in which the Fed chairman operates. It was another example of the chairman trying to show he leads by consensus.
Mr. Bernanke is a believer in research by Alan Blinder, a Princeton professor and former Fed vice chairman, which has shown that groups are often more effective at decision making than individuals. Mr. Bernanke's predecessors—Alan Greenspan, Paul Volcker and Arthur Burns—ruled more by individual force. Mr. Bernanke took over the Fed in 2006 wanting to change that.
Last week's move was a significant step in that direction. Mr. Bernanke pointed to that, and to the possibility that he won't be sticking around after his term ends in 2014, in a news conference following the meeting. "The chairman's term is not infinite," he said. "At some point there'll be a new chairman. But there's a lot more continuity on the [Fed] collectively."
If a new Fed chairman comes in two years from now wanting some dramatic shift in direction, that person will be faced with the uncomfortable fact that his colleagues' views are out there for all to see.
Still, this hasn't been an easy transition. Consensus at the Fed has also meant sometimes confusing cacophony among officials about what steps to take next. A closer look at Mr. Blinder's research might help to show why. Mr. Blinder and John Morgan, a University of California, Berkeley, professor, drew their conclusions after conducting experiments on group decision-making with university students last decade. They never looked at the performance of groups larger than eight people, Mr. Blinder says. They wanted to keep the groups modestly sized in part because they worried students might bolt to some other campus activity in the middle of the experiments.
The Fed is a much bigger group than that. "Seventeen people can't jointly run anything," says Mr. Blinder. That helps to explain the cacophony, and also why Mr. Bernanke, despite his devotion to consensus, has often seen fit to assert himself to push the group where he wants it to go, as his eventual successor might too.
The group dynamic at the Fed is additionally complex because not all of those 17 Fed officials vote at policy meetings. Only five of the 12 regional Fed bank presidents get to vote at meetings, on a rotating basis, meaning seven people regularly get to talk but not decide.
There appeared at last week's meeting to be some tension between the collective view of the larger group of 17 officials at the meeting and the narrower group of 10 that voted. The median forecast of the larger 17 put short-term interest rates at 0.75% at the end of 2014. The policy statement approved by the 10 who voted suggested the Fed expected rates to be near zero "at least through late 2014," a bit more dovish about the outlook for interest rates than the forecasts implied. Mr. Bernanke said in a news conference later that the view of the formal voters would always "trump" the larger group. Fed votes are required by law.
The second step—spelling out more explicitly goals for inflation and unemployment—is something Mr. Bernanke has long wanted. Michael Bordo, a Rutgers University economic historian, says he hopes that is a move by the Fed toward more systematic policy after several years of what looks like ad hoc decision making.
For those who worry the Fed is going to allow inflation to rise substantially, the central bank has now said as emphatically as ever that it wants to keep inflation around 2%. Yet Mr. Bernanke fudged this point a little, by noting that if inflation is above the goal and unemployment is also high, he might choose to take a little extra time trying to bring inflation down with restrictive monetary policy.
Mr. Bordo says the Fed "lost a lot of credibility" with its actions during the financial crisis. He thinks the inflation goal has a chance to put the central bank on a steadier course, "but I'm not sure if they've gotten there yet."
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