Dr. Econ: What steps has the Federal Reserve taken to
Central bank transparency has become an important feature
of monetary policy in recent years for many countries. In
I discussed why transparency is so important: not only is
it viewed as a responsibility
of central bankers, but transparency in policymaking also
enhances the effectiveness of monetary policy by aligning
public expectations with the goals of the central bank. Here,
I will focus on how the Federal
one of the world’s major central banks, communicates
with the public.
Transparency in central banks around the world: A change
During the past two decades, central banks around the world
have dramatically increased their efforts to be transparent
by enhancing communication with the public about policy decisions
and their assumptions about the economy. Prior to this attitude
switch, it wasn’t obvious whether clear communication
was something central bankers found important or even desirable.
This dramatic change can be summarized by the stark difference
between two quotes from Alan Greenspan, former Chairman of
the Federal Open Market Committee (FOMC), the Fed’s
monetary policy decisionmaking body. In his testimony to
Congress in 1987, Greenspan said,
“Since I’ve become a central banker, I’ve
learned to mumble with great incoherence. If I seem unduly
clear to you, you must have misunderstood what I said.”
Compare this with the following quote from Greenspan (still
Chairman at the time) 15 years later:
"[O]penness is an obligation of a central bank in
a free and democratic society."
There are many ways the Fed communicates with the public.
It would be impossible for me to discuss all of them, but
I will highlight a few that recently underwent significant
Speeches by Fed officials
Fed presidents and Board governors gave 191 public speeches
in 2006, according to the lists of speeches provided on Fed
Districts’ and the Board of Governor’s websites.
These speeches are powerful, as market participants turn
to them for clues about future monetary policy decisions.
While the influence of individual policymakers’ speeches
may have fallen in the past year according to one study by
Macroeconomic Advisers (Meyer and Sack 2007), the speeches
still are heavily scrutinized by market participants. Additionally,
the Macroeconomic Advisers study reports no significant change
in the importance of communication representing the view
of the whole committee, such as the FOMC meeting statements
and meeting minutes released after each FOMC meeting.
Representatives from many of the world’s central banks
also frequently give public speeches. A list of web links
to some of these speeches is included below.
The FOMC meeting statement and minutes
The FOMC meeting statement is released at about 2:15 p.m.
Eastern time on the day of each FOMC meeting. It has come
to be viewed as an additional policy
a mechanism which then-Governor Ben Bernanke explains in
“[M]uch of the potency of monetary policy lies not
in the FOMC’s ability to affect today’s federal
funds rate but rather in the Committee’s ability
to influence market expectations about future policy and,
the economically more relevant long-term rates. On this
important metric, the statement has become an increasingly
tool of policy.”
The statement today is brief, with four key components:
the federal funds target interest rate decision, the rationale
for that decision, the risks to monetary policy and the economy
associated with the decision, and how each member voted on
the policy decision. If there is a change in the discount
rate, this also will be communicated in the statement.
Figure 1: Anatomy of the FOMC meeting statement
The evolution of the statement is a great example of the
Fed’s movement towards transparency in recent years.
This statement first appeared in early 1994, and at first
included only an explicit announcement about the Committee’s
decision on the fed funds target interest rate. This was
a significant step in the FOMC’s communication with
the public — before 1994 it might have taken a roomful
of economists to determine what decision the FOMC had made!
Several key steps followed:
- Late 1994: Added descriptions of the state of
the economy and the rationale for the policy action
- 2000: Added “balance of risks” in
- 2002: Added votes of individual FOMC members
- 2003: Added forward-looking guidance on policy
FOMC meeting minutes are an important complement to the
meeting statement. The minutes provide greater detail on
the Committee’s monetary policy decision than does
the concise FOMC statement. The most recent important development
with respect to the minutes was the Committee’s December
14, 2004, decision to move up publication of each meeting’s
minutes to just three weeks after the meeting, and prior
to the subsequent meeting. This decision reduced the average
time between the meeting and the release of the minutes by
half, providing markets with greater context prior to the
next FOMC meeting, allowing them to more precisely formulate
expectations for what the FOMC’s next policy decision
might be (for more on FOMC meeting minutes, see Danker and
Both the short statement and the longer minutes for each
FOMC meeting are available from the FOMC’s
Monetary policy report to the Congress
Reserve Board’s Semiannual Monetary Policy
Report to the Congress is another document that lends
insight into the monetary policymaking process and the possible
path of monetary policy.
This report contains a discussion of monetary policy and
the economic outlook, as well as current economic and financial
Similar to the FOMC meeting statement and minutes, this
report also underwent some significant changes in recent
years. In July 2004 the forecast of core inflation rather than overall inflation
was included in the report. Since it is core inflation that
the Committee especially
focuses on when making its decisions, releasing the forecast of core inflation to the public significantly improves transparency
about information on which the FOMC directly bases part of
its monetary policy decisions. The February 2005 report was
the first to include a two-year rather than one-year forecast
for inflation, unemployment, and GDP; in the past, the February
report included an outlook for the current year only, and
the July report included an outlook for the current and next
NOTE: For additional steps the Fed has taken towards transparency from 2006 to 2012:
Dr. Econ (2012:Q2): You have written about Fed transparency before, but I wonder if the Federal Reserve has learned any new lessons in the aftermath of the financial crisis?
John C. Williams. 2011. "Opening the Temple." Annual Report, Federal Reserve Bank of San Francisco.
Bernanke, Ben. 2004. “Central Bank Talk and Monetary
Policy.” Speech at the Japan Society Corporate
Luncheon, New York, N.Y., October 7.
Cukierman, Alex. 2007. “The Limits of Transparency.” University
of Tel Aviv, unpublished manuscript.
Danker, Deborah, and Matthew Luecke. 2005. “Background
on FOMC Meeting Minutes.” Federal Reserve Bulletin,
Greenspan, Alan. 2002. "Chairman’s Remarks." Federal
Reserve Bank of St. Louis
Review , 84(4), July - August.
Meyer, Laurence, and Brian Sack. 2007. “Monetary
Policy Insights: Fixed Income Focus.” Macroeconomic
Links to speeches by representatives from some other central
Bank of Australia
of New Zealand
1 These quotes were cited by economist Alex Cukierman
(2007), who followed up the quote with his own analysis: “One
interpretation of the quote is that Greenspan was trying
to ridicule the tendency of the Fed to be secretive but
an equally plausible interpretation is that he was just
conveying the, then current, state of affairs without taking
a position on it.”
2 Quote also cited by Cukierman (2005).
3 See the July
2004 Monetary Policy Report to Congress