Montagu Norman, the Governor of the Bank of England from 1921 to 1944, reputedly took as his personal motto, "Never explain, never excuse."  Norman's aphorism exemplified how he and many of his contemporaries viewed the making of monetary policy--as an arcane and esoteric art, best practiced out of public view.  Many central bankers of Norman's time (and, indeed, well into the postwar period) believed that a certain mystique attached to their activities and that allowing the public a glimpse of the inner workings would only usurp the prerogatives of insiders and reduce, if not grievously damage, the effectiveness of policy.

An important corollary to the task of defining a policy rule is that the central bank ought not to be a source of random disturbances. All of us are well aware of the potential for saying things inadvertently that will create market misunderstanding of likely Fed future policy actions. ... One way to avoid misinformation is to avoid providing any information. Put another way, if my mouth is not open, I cannot put my foot into it.

In my view, however, it is important to try to convey correct information. I do not believe that I would be doing my job if fear of providing misinformation led me to provide no information. For this reason, I have maintained an active speaking schedule.

It is highly desirable that the central bank behave in a rule-like way, both for the political objective of the rule of law rather than the rule of men and because predictable policy promotes more efficient decisions in the private sector. To the maximum possible extent, we desire an equilibrium in which the markets behave as the central bank expects and the central bank behaves as the markets expect. Central bank behavior to anchor expectations of low and stable inflation is the single most important aspect of policy predictability. I believe that the Fed has come a long way in that direction though, obviously, there are certainly opportunities for the Fed to refine its policy rule. In this context, by “rule” I simply mean that the Fed’s policy actions are systematic and highly predictable responses to new information.

     As you know, this occasion marks the 30th year of semi-annual testimony on the economy and monetary policy for the Federal Reserve.  In establishing these hearings -- Mr. Hawkins and Humphrey were mentioned -- the Congress proved prescient in anticipating the worldwide trend toward greater transparency and accountability of central banks in making monetary policy. Over the years, these testimonies and the associated reports have proved an invaluable vehicle for the Federal Reserve's communication with the public about monetary policy, even as they have served to enhance the Federal Reserve's accountability for achieving the dual objectives of maximum employment and price stability set for it by the Congress.

For certain, the current Federal Reserve is the most open and transparent in history. We announce policy moves and issue policy statements. Further, the minutes of FOMC meetings are released on a timely basis so that the public can get a better sense of the range of views on the FOMC.

Although the Fed is much more transparent than at any time in its history, it is arguably less transparent than a number of other central banks. As you may well be aware, the FOMC is currently studying ways to further improve its communications. It is too early, however, to say precisely what the results of that inquiry will be. Suffice it to say that there is a realization in monetary policy-making circles, gained through recent advances in monetary theory and the experience of the last 30 years, that maintaining credibility for low inflation is an important aspect of good monetary policy.

The fact that you had very well informed people coming to different conclusions about what the statement meant -- that, in and of itself, is evidence that the statement was not completely successful.   If it were completely clear, well informed people would come to the same conclusion from the same words.

It is very difficult to craft these statements so that well informed people all come to the same conclusion.  Chairman Greenspan often wrote with the expectation that people would read between the lines. I think Chairman Bernanke is trying very hard to have people read the lines and not draw implications from reading between the lines when no implication was meant to be there.

From Q&A session, as reported by Bloomberg News

Although the Fed is much more transparent than at any time in its history, it is arguably less transparent than a number of other central banks.  Many central banks use an inflation target as a way to communicate policy objectives and report more extensive or frequent forecasts of economic activity and inflation to the public.  These reports are done in a number of different ways, and it is not clear if any particular method dominates the other.

As you may well be aware, the FOMC is currently studying ways to further improve its communications. It is too early, however, to say precisely what the results of that inquiry will be.

 

Monetary policy affects spending and inflation with long and variable lags. Consequently, policy decisions must be based on an assessment of medium-term economic prospects. At the same time, because economic forecasting is an uncertain enterprise, policymakers must be prepared to respond flexibly to developments in the economy when those developments lead to a re-assessment of the outlook. The dependence of monetary policy actions on a broad range of incoming information complicates the public's attempts to understand and anticipate policy decisions.

Clear communication by the central bank about the economic outlook, the risks to that outlook, and its monetary policy strategy can help the public to understand the rationale behind policy decisions and to anticipate better the central bank's reaction to new information.

Ready access to a wide variety of information is essential for transparency and accountability of monetary authorities and a full understanding of policy actions by the public...

Contrast the current situation with the one in 1979. At that time, actions by the Board of Governors on discount rate changes were reported promptly, but there was no press release subsequent to an FOMC policy action and FOMC meeting minutes were released with a 90-day delay. On Sept. 19, 1979, the Board of Governors voted by the narrow margin of 4-3 to approve a ½ percentage-point increase in the discount rate, with all three dissents against the increase. This information generated the public perception that the Fed officials were sharply divided and, therefore, that the Fed was not prepared to act decisively against inflation. John Berry, a knowledgeable reporter at the Washington Post, observed that “the split vote, with its clear signal that from the Fed’s own point of view interest rates are at or close to their peak for this business cycle, might forestall any more increases in market interest rates.”(9) However, the interpretation of the “clear signal” was erroneous. On that same day, the FOMC had voted 8 to 4 to raise the range for the intended funds rate to 11-1/4 to 11-3/4 percent. More importantly, three of the four dissents were in favor of a more forceful action to restrain inflation.(10) Neither the FOMC’s action, the dissents nor the rationale for the dissents were revealed to the public under the disclosure policies then in effect. The result was to destabilize markets, with commodity markets, in particular, exhibiting extreme volatility.

[C]entral bank transparency can go too far if it complicates communication with the public. Announcing a policy path may confuse the public if it does not sufficiently convey that the path is conditional on events in the economy. The public may then see a deviation from this path as a central bank failure, and the central bank would then be vulnerable to attacks that it is flip flopping which could undermine the support for its independence and focus on price stability. This objection does not mean that providing information about the future policy path in some form has no value. It does mean that there are nuances as to how this could be done. Providing information about the future policy path in more general terms or in terms of fan charts that emphasize the uncertainty about the future policy path might achieve most of the benefits of increased disclosure and still make clear how conditional the policy path is on future events.

Transparency in monetary policy cannot mean that the central bank conveys more confidence in the outlook for growth and inflation than it can reasonably have, and it cannot provide more assurance about the likely future course of policy than it actually has.

I believe these two features of Fed monetary policy—a systematic approach to policy and the steps towards more open communication and transparency—are particularly noteworthy in contributing to our policy success over the past two decades. They have helped strengthen public confidence in the Fed and thereby helped anchor inflation expectations to price stability. Additionally, by providing clear explanations of its policies to the public, greater transparency has also enhanced Fed accountability, a vital consideration for a government institution in a democracy.

Although the evidence from surveys and financial markets is admittedly mixed, taken together these studies suggest that announcing a numerical price stability objective and greater transparency in general could help further anchor long-run inflation expectations. My personal view is that the steps that we have already taken toward greater transparency have been a good thing, and that we should think seriously about venturing further along this path

I support the idea of a quantitative objective for price stability. I believe that it enhances both Fed transparency and accountability and that it offers important benefits, as I have discussed. In particular, it could help to anchor the public's long-term inflation expectations from being pushed too far up or down, and thus help avoid both destabilizing inflation scares and deflations; a credible inflation objective could thereby enhance the flexibility of monetary policy to respond to the real effects of adverse shocks.

These aspects of global monetary arrangements and financial conditions have important implications for how we communicate about monetary policy. They strengthen the case for why central banks should be clear about their objectives and credible in their commitment to price stability. They reinforce the case for preserving the flexibility to adjust policy in response to changing conditions. And they underscore the importance of being open about the greater level of uncertainty we face in understanding the forces at work on the trajectory of demand and inflation. Central banks, of course, need to be careful not to convey more certainty about what we know than we reasonably can know.