I haven’t conducted a poll, but I think I’m on solid ground when I say most Americans think the Federal Reserve is boring. (Here, of course, I’m refusing to acknowledge that quite a few Americans have never heard of the Fed.) No doubt there are a handful of Americans out there who get heart palpitations before each FOMC rate cut decision, but I’d be willing to bet that a vast majority of those excitable souls are economists with posters of Irving Fisher above their headboards.

Yet, as we sit waiting for what will likely be the central bank’s second rate cut in just a little over a week, I’m finding the Fed more and more intriguing. I wouldn’t quite say I think the Fed “exciting,” but I did just yesterday pick up a copy of the Federal Reserve Bank of St. Louis Review for January/February 2008 and, in it, read a copy of William Poole’s September 28, 2007 speech, “Thinking Like a Central Banker.” (The text of the speech is also available on the St. Louis Fed’s website.)

I found the speech enlightening and accessible and, at the same time, cautionary. Why cautionary? Well, as the economy weakens and the Fed takes more dramatic action, I see the institution departing from one of the principles that rang most true to me in Poole’s speech. Throughout the speech, Poole argues that the Fed’s “strategy in mitigating risk must work through the markets and by shaping accurate market expectations about future central bank behavior.” In other words, this Fed governor emphasizes that the central bank’s mission is not only to do tangible things like raise or lower the discount rate, but also to focus on a very important intangible – making sure the markets can predict its actions.

Poole elaborates with this: “Efficient planning in the private sector requires that expectations about government policies be accurate, or as accurate as the inherent uncertainty of the economic environment permits. Policymakers ought not to add to inherent economic uncertainty.”

Now, think of those two lines in the context of the Fed’s “surprise” rate cut of January 22, 2008. The fact that we describe the cut as a “surprise” is an admission that the markets did not expect it to come when it did. Of course, securities responded favorably to the surprise, but, by Poole’s logic, that result probably wasn’t worth what it cost in making the Federal Reserve’s actions less easy to predict.

Poole was the only one of the Fed governors who voted against the interim rate cut. In doing so, he affirmed the beliefs he outlined in the speech that inspired this blog entry. Are those beliefs correct? I’m certainly not qualified to say. What I am qualified to say is that his theory makes me even more interested in the Federal Reserve, which I still wouldn’t call an “exciting” institution. But, perhaps that is a good thing, particularly if you ascribe to Poole’s theory. After all, an exciting Fed would be an unpredictable Fed, which would brew an unstable economy and send all those economists with posters of Irving Fisher above their headboard into cardiac arrest.