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FOMC Transparency
Ozark Chapter of the Society of Financial Service Professionals
Springfield, Missouri
October 6, 2004
Published in the Federal Reserve Bank of St. Louis Review, January/February 2005, 87(1), pp. 1-9

T

ransparency is at the forefront of many
monetary policy debates today. The
Federal Open Market Committee
(FOMC) has had several formal discussions of communications issues in recent years,
and the subject comes up fairly frequently in
FOMC meetings and speeches by FOMC
members.1
It is hardly surprising that central bankers are
more talkative than they were just a decade or so
ago—and more concerned about how to improve
transparency and communication with the market.
Perhaps only one issue is settled: Transparency
is important but is hard to accomplish because
miscommunication is so easy. Clearly, more talk
does not necessarily mean greater transparency.
Discussions of monetary policy communication frequently center on three dimensions of
transparency: (i) transparency about the objectives
of monetary policy, (ii) transparency about current
monetary policy actions, and (iii) transparency
about expected future monetary policy actions.
I’ll organize my remarks around these dimensions.
Before proceeding, however, I want to emphasize that the views I express here are mine and
do not necessarily reflect official positions of the
Federal Reserve System. I thank my colleagues at
the Federal Reserve Bank of St. Louis, especially
Bob Rasche, senior vice president and director of
the Research Division, and Dan Thornton, vice
president in the Research Division, for their extensive assistance, but I retain full responsibility for
errors.
1

BACKGROUND
The first formal move in the direction of
transparency was initiated by the Reserve Bank
of New Zealand, which in 1990 negotiated an
agreement with the government of that country,
making the Bank responsible for maintaining
inflation within a specified range. Hence, the
Reserve Bank of New Zealand was the first central
bank to be transparent about its policy objective.
The Reserve Bank of New Zealand has been a
leader on the other two dimensions of transparency
as well. For some time now it has announced its
setting of its policy instrument—the official cash
rate. The Bank also publishes, on a semiannual
basis, its forecasts over a several-year horizon for
a number of economic variables, including the
90-day bill rate. Given that the Reserve Bank of
New Zealand states that the 90-day rate is closely
linked to its official cash rate, these forecasts come
very close to projecting a conditional course of
monetary policy actions. Thus the Reserve Bank
is transparent on all three dimensions of transparency I outlined earlier.
A number of other central banks have followed
the lead of the Reserve Bank of New Zealand by
adopting and announcing specific numeric inflation objectives. These central banks have become
known as “inflation targeters.” Currently included
in this group are the Bank of Canada, the Reserve
Bank of Australia, the Bank of England, and the
central banks of Albania, Brazil, Chile, Colombia,
the Czech Republic, Georgia, Hungary, Iceland,
Israel, Mexico, Norway, Peru, the Philippines,

I myself gave a speech on the subject in August 2003: “Fed Transparency: How, Not Whether.” The speech was later published in the Federal
Reserve Bank of St. Louis Review, Vol. 85, No. 6 (November/December 2003, pp. 1-7).

1

MONETARY POLICY AND INFLATION

Poland, Serbia, Sierra Leone, South Africa, South
Korea, Sri Lanka, Sweden, Switzerland, Tanzania,
Thailand, and Turkey. All of these institutions
are transparent with respect to their monetary
policy objectives. Moreover, all of these central
banks announce changes in the settings of their
policy instrument (typically a short-term interest
rate). Practice differs from institution to institution
on the release of forward-looking information
such as forecasts for future developments in the
economy.
The practice of the European Central Bank
(ECB) differs somewhat from that of the “inflation
targeters.” The ECB offers a degree of transparency
with respect to its monetary policy objective—
the ECB has an announced goal of keeping the
inflation rate close to but below 2 percent per
annum “in the medium run.” However, the ECB
has never announced an explicit definition of the
“medium run.” The ECB announces changes in
its policy rates, but does not disclose forecasts
for the European Union economies or minutes
of policy discussions.
The Federal Reserve’s practice of transparency
has evolved over time. I will discuss this evolutionary process with respect to the three dimensions of transparency. I note at the outset that I
endorse unconditionally only the first two dimensions of transparency. For reasons I will make clear
later, forecasting future policy actions is a complicated issue; without discussing the complexities
and the nature of possible policy forecasts, it
would be misleading to offer a simple “I support”
or “I oppose.”

THE EVOLUTION OF
TRANSPARENCY AT THE
FEDERAL RESERVE
Originally, the minutes of the FOMC meetings
were not made public. In response to passage of
the Freedom of Information Act, which became
effective in 1967, the FOMC divided the minutes
into two documents. One was called the Memorandum of Discussion, which was released with a
five-year lag. The other was a shorter document
2

called the Record of Policy Actions, which was
released with relatively little delay. The Memorandum was a set of complete minutes, identifying
speakers, but not in the form of a verbatim transcript. The Record of Policy Actions reported the
Committee’s decisions and provided a summary
of the Committee’s deliberations. However, the
Record did not identify by name which FOMC
members took which positions.
In 1976, in response to a court suit challenging
the legality of delaying the release of the Memorandum, the FOMC discontinued publication of
that document. The Committee continued to
publish the Record of Policy Actions but in 1993
changed its name to “Minutes of FOMC Meetings.”
Over time the release lag on the Record/Minutes
was shortened until, at the present time, the
Minutes are available two days after the next
scheduled FOMC meeting.
In the fall of 1993, members of the FOMC
became aware that tape recordings of all FOMC
meetings since March 1976 had been preserved.
These tapes had been made to assist with the
preparation of the Record of Policy Actions and
to provide accurate information about the Committee’s views on current policy to senior staff
members. However, it was commonly thought
within and without the Federal Reserve that the
tapes were destroyed when that process had been
completed. Many FOMC members where surprised
when they learned that the tapes still existed.
In response to congressional pressure, the
FOMC agreed in February 1995 to release, with a
lag of five years, verbatim transcripts created from
the tapes of FOMC meetings and to transcribe
past recordings as quickly as possible. At the
present time, published transcripts are available
for all FOMC meetings from 1979 through 1998.
The transcript is complete, except for redactions
of confidential material relating to individual firms
and foreign governments and central banks. No
other central bank provides such complete and
explicit records of its policy deliberations.
The FOMC has not adopted a precise, numerical statement of its monetary policy objectives.
The Federal Reserve Act, as amended, requires
the Board of Governors and the FOMC “to promote

FOMC Transparency

effectively the goals of maximum employment,
stable prices and moderate long-term interest
rates.” The FOMC has interpreted its objective as
the responsibility to achieve price stability to
promote maximum sustainable economic growth.
In contrast to the inflation-targeting central
banks, the FOMC has never associated a value or
range of values with “price stability.” Chairman
Volcker eschewed quantitative specifications of
price stability in favor of a less-specific definition.
In a 1983 lecture, Volcker put his position this way:
A workable definition of “reasonable price
stability” would seem to me to be a situation in which expectations of generally rising (or falling) prices over a considerable
period are not a pervasive influence on
economic and financial behavior. Stated
more positively, “stability” would imply
that decision-making should be able to proceed on the basis that “real” and “nominal”
values are substantially the same over the
planning horizon—and that planning
horizons should be suitably long.2
Subsequently, Chairman Greenspan adopted
essentially the same definition of price stability.3
A small step toward a more explicit statement
of the FOMC’s inflation objective was taken in
2003 when, at the May FOMC meeting, the
Committee indicated that “the probability of an
unwelcome substantial fall in inflation, though
minor, exceeds that of a pickup in inflation from
its already low level.” This statement gives a hint
about the view of Committee members of the lower
end of a tolerance range of measured inflation.
At that time, inflation, as measured by the Committee’s preferred “core” personal consumption
price index, was approximately 1 percent. To date,

the Committee has not addressed the question as
to what inflation rate would mark the limit such
that a substantial rise in inflation above that rate
would be unwelcome.
The transparency of the FOMC with respect
to policy actions has improved considerably over
the past 10 years. Beginning with the February
1994 meeting, the FOMC issued a press release
at the conclusion of every meeting at which a
policy action was initiated. In spite of the fact
that policy actions had been formulated in terms
of a specific quantitative objective for the effective
federal funds rate since the 1980s, the FOMC only
began including the quantitative funds rate objective (called the “intended federal funds rate”) in
its formal directive to the Federal Reserve Bank
of New York at the August 1997 FOMC meeting.4
Beginning with the May 1999 FOMC meeting,
the FOMC issued a press release at the conclusion
of each meeting at which there were major shifts
in the Committee’s views about prospective developments. These statements included an indication
of the policy “bias,” which was widely interpreted
in the press and in financial markets as hinting
at future policy actions.
After the January 2000 FOMC meeting, the
policy “bias” in the press release was dropped in
favor of a “balance-of-risks” assessment. The
statement following the September 2004 FOMC
meeting read as follows: “The Committee perceives
the upside and downside risks to the attainment
of both sustainable growth and price stability for
the next few quarters to be roughly equal.” To
provide guidance on its thinking, the Committee
might assess the risk of achieving one or the other,
or both, of the goals to be tilted to the upside or
downside.
Adoption of the balance-of-risks language
reflected the Committee’s effort to avoid confusion

2

Paul A. Volcker, “Can We Survive Prosperity?” Remarks at the Joint Meeting of the American Economic Association and the American Finance
Association, San Francisco, December 28, 1983, p. 5.

3

See for example, Alan Greenspan, “Transparency in Monetary Policy,” Federal Reserve Bank of St. Louis Review, July/August 2002, 84(4), p. 6.

4

However, starting with the meeting in January 1996, the Committee’s statement issued after a meeting at which it changed the intended funds
rate did indicate the anticipated change in the federal funds rate in quantitative terms: “In a related move, the Federal Open Market Committee
agreed that the reduction would be reflected fully in interest rates in the reserve markets. This is expected to result in a reduction in the federal
funds rate of 25 basis points, from about 5½ percent to about 5¼ percent” (from the statement issued January 31, 1996).

3

MONETARY POLICY AND INFLATION

about the interpretation of the wording of the
“bias” statement, which specifically referred to
the “intermeeting period.” The replacement balance-of-risks statement focuses on providing
insight into the Committee’s assessment of the
outlook for future real growth and inflation, but
falls short of providing a full fledged forecast of
the economy. Along with the decision to adopt
the balance-of-risks language, the Committee
adopted the policy of providing a press release
after every FOMC meeting.
Another important step toward morepredictable policy was for the FOMC to confine
policy actions to regularly scheduled meetings.
Since February 1994, policy actions other than
at a regularly scheduled FOMC meeting occurred
only in unusual circumstances.
Finally, in May 2003 the Committee added
an additional sentence to the press release: “In
these circumstances, the Committee believes that
policy accommodation can be maintained for a
considerable period.” This language was revised
in January 2004 to “the Committee believes that
it can be patient in removing its policy accommodation.” A second revision occurred in May 2004
to “the Committee believes that policy accommodation can be removed at a pace that is likely to
be measured.” The first two versions of this sentence were commonly interpreted as placing the
Committee on hold with respect to future policy
actions; the last revision was widely interpreted
as hinting that the intended funds rate would be
raised in a succession of 25-basis-point increments.
Most recently, in June 2004, the Committee
conditioned its “measured pace statement” with
the additional sentence that “the Committee will
respond to changes in economic prospects as
needed to fulfill its obligation to maintain price
stability.” To date, the actions of the Committee
have been consistent with the public interpretations of these statements; no changes in the funds
rate occurred under the “considerable period” and
“patient” statements, and there have been three
increases of 25 basis points each in the intended
5

4

federal funds rate under the “measured pace”
statement.

WHY TRANSPARENCY?
It is natural to ask why central banks need to
be transparent. One answer is that central banks
are governmental agencies and as such are
accountable to the public for their actions. As
laudable as it sounds, the accountability argument
only gets you so far. For years, Federal Reserve
officials argued that immediate release of policy
decisions would make markets more unstable and
policy implementation more costly and difficult;
creating these effects through disclosure would
obviously be inconsistent with the Fed’s public
responsibilities.5
Views on whether immediate release of policy
decisions would damage monetary policy have
changed. Still, the same basic issue remains: How
do we determine what level of transparency serves
the public interest? For example, some have suggested that the FOMC should conduct its deliberations in public, perhaps televised on C-SPAN.
Common sense and experience suggest, however,
that such a practice would curtail the free and
open exchange of ideas that characterize FOMC
meetings.
Anything that would diminish the effectiveness of the policy process would be inconsistent
with the Fed meeting its responsibilities. Accountability requires only that a central bank be open
and honest about its objectives and be held
accountable for achieving those objectives. Certainly, the ultimate test is whether disclosure
yields better policy outcomes.
The roots of central bank transparency are
found not only in the principles of democratic
accountability but also in economic theory. The
economics of transparency is a subject that can
be studied systematically, using all the tools of
modern economics. Both economic theory and
experience demonstrate that the effects of monetary
policy on the real economy—real gross domestic

The minutes of the FOMC meeting of June 20, 1967, list six reasons for delayed release of information.

FOMC Transparency

product, real interest rates, the unemployment
rate, etc.—are transient. Monetary policy actions
only have a lasting effect on inflation, although
uncertainty about policy can increase short-run
volatility and, perhaps, damage the economic
growth process. In such a world, the role of the
market’s expectations about the central bank’s
objective for inflation is the principal reason for
central bank transparency.
Here is where the story gets a little complicated, so it is useful to consider some extreme and
unrealistic cases to illustrate the point. Consider
a world where monetary policy actions have no
long-run impact on real variables, such as the
unemployment rate, but no short-run impact either.
Economic theory predicts this state of affairs if all
wages and prices were perfectly flexible. In such
a world, economic agents would realize that an
easing of monetary policy would result in higher
prices. Knowing this outcome, prices would adjust
immediately: Policy actions would have no effect
on the real economy.
Of course, in the real-world economy, prices
are not perfectly flexible. This feature of market
behavior means that policy actions have short-run
effects on the real economy. A policy problem
arises because policymakers do not know exactly
how monetary policy actions are translated to
the real economic variables; policymakers must
estimate, or guess, the magnitude of the response
of such variables to policy changes and how long
these effects last. The only certainty is that the
effects of policy actions on real variables eventually dissipate. “Eventually” may cover a period of
several years and may be longer in some circumstances than others. It is worth noting that these
hedges on my part reflect ignorance—mine and
the profession’s—and not obfuscations. We just
don’t have precise estimates of the magnitudes
and durations of effects of monetary policy on
real variables.
Given that policy actions have a transient
effect on the real economy, but a lasting effect
only on prices, and given that the effects on the
real economy are uncertain in both magnitude
6

and duration, it is important that the central bank
be transparent about both its short-run objective
for the real economy and its long-run inflation
objective. Transparency should help markets to
make the best possible adjustments over time and
minimize uncertainty flowing from monetary
policy itself.
Consider now the issue of the inflation
objective. While there is widespread agreement
among policymakers and the profession that rapid
inflation—such as the inflation that characterized
the 1970s and early 1980s—has damaging consequences for the real economy, particularly the
long-term rate of economic growth, there is much
less agreement on the rate of inflation that maximizes the long-run rate of economic growth. That
is, there is little agreement among economists
and policymakers about the “optimal” rate of
inflation. At the July 1996 meeting of the FOMC,
in response to a question by Governor Yellen about
the level at which inflation no longer affects
business and household decisions, Chairman
Greenspan responded, “zero, if inflation is properly measured.”6
I agree. Given the known biases in price
indices, however, exactly what this definition
implies for inflation as measured by the personal
consumption expenditure (PCE) price index or
the consumer price index (CPI) is uncertain. I am
inclined to believe that zero inflation correctly
measured translates into about 1 percent inflation
for the PCE and about 1.5 percent for the CPI.
There is much less agreement in the profession
about how much and how long real economic
variables are affected by policy actions. This disagreement is confounded by the fact that the
effects of monetary policy on the real economy
can be influenced by other developments over
which policymakers have no control. For example,
a particular policymaker might argue that a given
easing of policy will not show in prices for x
months if there are no other changes in the economic environment. The same policymaker would
likely argue that this period will be longer if the
easing in policy is accompanied or followed

Transcript of the July 2-3, 1996, meeting of the FOMC, p. 51.

5

MONETARY POLICY AND INFLATION

closely by a marked increase in productivity. If
the increase in productivity were permanent, this
policymaker might argue that the policy easing
may have no effect on the price level: Indeed, the
rise in productivity could more than offset the
policy actions so that, in the long run, prices
decline rather than increase, as they would in an
unchanged economic environment.
It is easy to see how uncertainty about the
magnitude and timing of the effects of policy
actions, combined with uncertainty about how
other factors impact the magnitude and timing of
these effects, can result in significant differences
of opinion about the effects of monetary policy.
That means that there may also be significant
differences of opinion about the extent to which
policy can be used effectively to offset the effects
of sudden shocks, or evolving long-run structural
changes, to the real economy.
Given these real-world uncertainties, it is
important for policymakers to be as explicit as
possible not only about the central bank’s long-run
inflation objective but also about its short-run
policy objectives. The more ambiguous policymakers are about these objectives, the more difficult it will be for the public to differentiate policy
actions that may reflect a change in the central
bank’s long-run inflation objective from actions
intended only to offset the effects of real shocks
on economic activity.
Of course, uncertainty about the inflation
objective could be reduced by adopting a specific
numerical long-run inflation objective. Real-world
experience with announced inflation objectives
in other countries shows that the issue is more
complicated than it might seem. If an objective
is stated as a number, what is the effective range
around that number? That is, an inflation objective
stated as 2 percent might in practice mean 1 to 3
percent. Is the objective to be met over a time
horizon of six months or two years? Might the
objective be temporarily modified in the face of
special circumstances, such as the 9/11 attacks?
Being clear about an inflation objective means
7

6

being clear, or as clear as possible, about all dimensions of such an objective. I personally believe
that it is possible to address these practical concerns and state an inflation objective in an effective way. But that is a subject for another day.
Although the FOMC has not announced a
precise inflation objective, it has taken a number
of steps to better communicate its objectives. The
FOMC has made it clear that it “seeks monetary
and financial conditions that will foster price
stability and promote sustainable growth in output.” This statement clearly indicates that the
Committee’s price stability objective is consistent
with sustainable growth in output. While reasonable people may differ on exactly what this inflation rate is, very few would argue that inflation
of 4 percent or higher is consistent with maximum
sustainable output growth. Most would choose a
much lower rate.
The Committee has yet to form a consensus
on the circumstances and extent to which monetary policy can be used to offset shocks to the real
economy without endangering its price stability
objective. To the extent that it reveals the Committee’s sensitivity to short-run objectives of policy,
the balance-of-risks statement is beneficial in this
regard. The balance-of-risks statement also gives
market participants a sense of the Committee’s
views on what it believes the risks are for its shortrun and long-run objectives going forward.
The balance-of-risks language is, however,
somewhat ambiguous. For example, one might ask:
If the risks are unbalanced, why was policy not
adjusted to create balanced risks going forward?
One answer is that there is no need that these risks
be balanced. The inflation objective is a long-run
objective, while other objectives are short-run.
There is no economic rationale for balancing such
objectives.
The balance-of-risks statement can be misinterpreted because of the prevailing view that
employment and inflation necessarily rise and
fall together. In fact, employment and inflation,
or their changes, are not highly correlated.7 A

William Poole, “Fed Transparency: How, Not Whether,” Federal Reserve Bank of St. Louis Review, November/December 2003, 85(6), p. 7.

FOMC Transparency

scatter plot of the changes in employment and
inflation reveals that there is no strong positive
relationship between inflation and employment.
Sometimes they move together; sometimes they
move in opposite directions. Consequently, in my
view, an unbalanced balance-of-risks statement
should not be interpreted as an indication of a
future policy action in a specific direction. Unfortunately, it is too often interpreted that way by
market participants. By failing to clarify the intent
of this statement, the FOMC tacitly shares in this
confusion.

STATEMENTS ABOUT FUTURE
POLICY
In 2000, the FOMC switched from the “tilt”
language to the balance-of-risks language, with
the explicit intent to avoid signaling future policy
actions. Nevertheless, in August 2003 the Committee added a statement that was intended to
give the public some idea of how it believed policy
might proceed in the near future.
Of necessity, monetary policy is made with an
eye to the future—there is nothing current policy
can do about the past. Because of the inherently
forward-looking nature of policymaking, policy
is made with an expectation of how future events
are likely to unfold. Moreover, it is only natural
that policymakers assign a higher probability to
some events than to others. In so doing, policymakers form judgments about whether additional
moves to tighten or loosen policy are likely to be
desirable. In our present situation, the issue is
whether policy tightening might proceed more
slowly or more rapidly than one might otherwise
anticipate.
The issue with such statements is that they
might be misinterpreted as a firm commitment
to proceed in a specific way. At any given time,
policymakers might feel more or less certain about
the probable direction of policy in coming months,
but I think it safe to say that they never believe
that future policy should be totally unresponsive
to events. No matter how firm a conviction I have

about the future direction of policy, I know that
things could happen that would make me change
my mind. The terrible events of 9/11 illustrate
this point dramatically. It would have been irresponsible for the Fed to continue on a preset path,
ignoring this event.
Thus, forward-looking Fed policy statements
should always be interpreted as conditional on
future events. A forward-looking statement is not
an ironclad commitment but rather a statement
of belief based on what we now know. It is unfortunate whenever such a statement is read as a
commitment. The objective or expected path for
the intended federal funds rate is set based on all
of the currently available information—including
expectations of future events. If the future turns
out exactly as policymakers anticipated at the
time the policy path is set, there will be no need
to reset it. Only when new information suggests
that the previous setting is no longer consistent
with achieving the objectives of policy does the
Committee need to adjust the setting.
At any given time, the policy path I anticipate
may be held with greater or lesser conviction. Put
another way, it may take more or less new information outside the range of what I had anticipated
to change my mind on the path. Policy decisions
are sometimes close calls and sometimes not. And,
of course, different policymakers do not all see
things the same way. The communications challenge with respect to future policy is to convey
accurately how clear the likely policy direction
is. Sometimes the expected policy course might
be changed only if major unforeseen events occur
and sometimes if an accumulation of smaller bits
of new information suggest that a change in policy
is appropriate.
Given these ambiguities and the danger of
misleading the market when indicating a probable
future course for policy, I have generally been
opposed to announcing, or hinting at, future policy
adjustments. However, this year’s situation is
unusual. When the current round of policy tightening began last June, the target for the intended
federal funds rate was 1 percent. After three adjustments of 25 basis points each, the rate now stands
7

MONETARY POLICY AND INFLATION

at 1.75 percent. When the process started, there
was little doubt in anyone’s mind that a 1 percent
funds rate was significantly below the long-run
equilibrium consistent with price stability. Hence,
there was little doubt that, over time, the FOMC
would raise the intended funds rate. By saying
that the policy tightening could proceed at a
measured pace, the FOMC indicated a belief that
economic conditions going forward likely would
allow steady adjustments of the funds rate
toward its long-run equilibrium level.
As the process continues, obviously, the
intended rate will in time reach a level such that
it is not so clear any more that further increases
are in order, or that further increases should continue at the same pace. The measured-pace language remains in the FOMC’s most recent policy
statement, reflecting the Committee’s expectation
at its last meeting, in mid-September. What actually happens will depend on economic events
that are subject to wide forecasting errors. Hence,
it is important the market not interpret this statement as a commitment. It is possible—I would
argue, likely at some point—that new information
will cause the FOMC to adjust the target at a pace
different from what is currently anticipated. The
pace could be faster or slower, depending on how
the economy evolves. In an attempt to underscore
this eventuality, the Committee added a sentence
to its June 2004 public statement and reiterated
it in August and September. The statement read:
“Nonetheless, the Committee will respond to
changes in economic prospects as needed to fulfill
its obligation to maintain price stability.”
I believe that it is important to provide as
much information as possible about the rationale
for policy actions. It might be useful to provide
information about likely future policy on a routine
basis, but the difficulties of doing so should not
be underestimated.
For one thing, the FOMC will not necessarily
agree on the likelihood of a future action. It may
be confusing to the public if a policy direction is
indicated after some FOMC meetings, when the
direction is pretty clear, and not after other meetings, when the probable direction is not clear or
8

is subject to dispute within the FOMC. Even if an
agreement could be reached, communicating it
to the public would be difficult. Indeed, if the
probability of future policy action were sufficiently
large, some observers might ask, why wait; why
not take the action now?
Moreover, it is important to note that a statement of probable future policy direction may actually be a more important policy decision than
the setting of the current intended federal funds
rate. How easy would it be for a member to agree
to a policy action on the intended federal funds
rate but dissent over the wording of the policy
statement indicating a probable future direction
to policy? The FOMC decision process certainly
includes the obligation of FOMC members to
dissent when they have a fundamental disagreement with the policy decision; that process is well
understood today with reference to the decision
on the intended federal funds rate. To maintain
the integrity of the dissent process, the public
will have to understand that dissents may be in
order over the wording of the policy statement, a
possibility that has not been widely discussed.

CONCLUDING REMARKS
Let me summarize this discussion. The basic
framework for policy is that the FOMC sets the
intended federal funds rate and individual members have in mind a probable future course for the
funds rate. The probable future course may be
pretty clear, or may not be, depending on circumstances. Committee members vote on the intended
funds rate at the end of each meeting, but historically have not voted, or even tried to develop a
consensus, on the probable future direction of
policy. Members understand that, whatever their
views about the future, actual policy actions in the
future will be conditional on information about
the economy that cannot be forecast. What the
FOMC does in the future is of necessity determined jointly by the FOMC’s policy objectives
and economic events as they unfold.
The Committee has an obligation to be clear
about its policy objectives and should announce

FOMC Transparency

any changes in those objectives. In fact, there is a
broad public consensus about these objectives
and I would be surprised if the objectives change
in any material way in the future. Objectives may
be clarified, but I do not anticipate significant
change.
With clarity over objectives, the FOMC needs
to act in as consistent a way as possible in pursuit
of the objectives and to explain the process as
clearly as possible. When the process is well
understood, it is unlikely that policy actions will
take the market by surprise. These policy actions
will typically be driven by the arrival of new information, which could not be forecast accurately
at the time of previous FOMC meetings.
In instances where the market appears to misinterpret the objectives or the intent of a particular
action, the FOMC must endeavor to clarify its
intention. But more important than dealing with
individual episodes is ongoing discussion about
monetary policy. A danger in relying on the
FOMC’s own forecasts of its policy direction is
that the market will focus on these forecasts and
not on the underlying rationale. Were that to
happen, the market will inevitably be surprised
when events require policy actions that differ
from the FOMC’s own forecasts.
Now that you’ve heard my argument, I’m sure
you will agree that transparency may sound easy,
but is not.

9