Central bank transparency has become an important feature of monetary policy in recent years for many countries. In June 2006 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 Reserve, one of the world’s major central banks, communicates with the public.
Transparency in central banks around the world: A change in attitude
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.” 1
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." 2
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 changes.
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 instrument, a mechanism which then-Governor Ben Bernanke explains in a 2004 speech:
“[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, consequently, the economically more relevant long-term rates. On this important metric, the statement has become an increasingly important 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 the economy
- 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 Luecke (2005)).
Both the short statement and the longer minutes for each FOMC meeting are available from the FOMC’s webpage.
Monetary policy report to the Congress
The Federal Reserve Board’s Semiannual Monetary Policy Report to the Congress is another document that lends insight into the monetary policymaking process and the possible future path of monetary policy. This report contains a discussion of monetary policy and the economic outlook, as well as current economic and financial developments.
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.3 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 year.
NOTE: For additional steps the Fed has taken towards transparency from 2006 to 2012:
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, Spring 2005.
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 Advisers Commentary.
Links to speeches by representatives from some other central banks
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.”
3. See the July 2004 Monetary Policy Report to Congress