Transparency must mean disclosing as much as possible without damaging the integrity of policy deliberations.

Much of the FOMC deliberation consists of fairly technical discussions. Without an advanced degree in economics, or extensive policy experience, much of this material is simply incomprehensible...  Moreover, a certain amount of communication during an FOMC meeting is nonverbal... The thrust of my argument is that the word “transparency” is misleading with respect to Federal Reserve communications challenges.  Instead, the Fed needs a conscious communications strategy rather than a strategy of simply “opening up.”

It is sometimes argued that policy communications should be vague to retain policy flexibility. My own view is that communications should be clear about what is known and what is not.

As an aside, note that there are policy environments in which a random component to a policy is an essential feature for policy success. Transportation of large sums of cash in an armored truck is an example. The transportation schedule and route should be randomized as much as possible to reduce the probability of theft. To my knowledge, in models of macroeconomic policy no one has created a positive case for randomness.

Well, we are trying, and we have been for some time, to be transparent and as clear as we can about our strategy, our objectives and our approach. And one of the implications of that has been that interest rate moves have been highly predicted by the markets.  And I think as a general matter that that's good. It reduces volatility in financial markets and makes policy actually more effective.

[I]n the short time I have today, I cannot do justice to all the accomplishments, innovations, and successes the Fed has achieved under {Greenspan's} leadership. So I'll focus on two aspects of policy that I believe have been especially important to this sterling record—a systematic, and therefore understandable and predictable approach to policy, and a growing emphasis on communication and transparency.

Regarding communicating central bank policy changes have evolved considerably over the 30+ years I have worked in the Federal Reserve System, and I believe there can be no doubt this has been a good thing...In several steps the Committee evolved to its present policy of announcing its action after every meeting, disclosing the vote and any dissents, and publishing the minutes of the meeting after three weeks. In my view, this level of communication has helped the public understand Fed policy, and has been useful recently in assuring jittery markets that policy accommodation could remain for “a considerable period”, and then be removed at “a measured pace”.

It is clear that communication by policymakers, whether in the statement itself or in speeches or testimony, can be quite powerful. Even when carefully crafted, it risks the interpretation of a pre-commitment to action when that is not the intent. I recognize forward-looking language from a central bank can help to anchor markets, but, absent unusual circumstances, I wonder whether the resulting sense of policy certainty that can be conveyed is appropriate given the fact that often the next move of the Committee is not a foregone conclusion. Is there a risk that such communication will limit the flexibility of monetary policy setting? Or, conversely, could such communication produce policy inertia? I do not know the answers to these questions but they do nag at me.

I believe the Committee has reinforced its credibility with the public by becoming more transparent and focusing on communication.

Central bank credibility is an aspect of the broader issue of trust. Credibility and trust, once lost, can be extremely expensive to regain. I believe that most policymakers recognize this fact, and the recognition has much to do with efforts to enhance transparency to build trust.

Although predictable policy—the body language—is the most important feature of the current situation, improved policy communication has also played a significant role. Perhaps the most important step the FOMC has taken to improve policy communications was the release of the policy decision immediately following each FOMC meeting, starting in February 1994. Other steps, such as more timely release of minutes of FOMC meetings, have been helpful.  I believe that there is a consensus that better communication furthers the goal of informing the markets more completely about the course of monetary policy, enabling market participants to make more efficient decisions...As every central banker knows and has most likely experienced, communication is difficult because it is so easy to be misunderstood. Miscommunication adds uncertainty and creates market volatility...Increased attention to communication has a benefit that is frequently overlooked—an improvement in the clarity of internal deliberations. In a committee context, explicit understanding of policy goals and agreement on policy direction must precede public communication. We need to know what we want to say before we try to say it.   

Transparency requires careful attention by policymakers, and so constrains the time they have for actually making decisions.  More importantly, excessive transparency could inhibit policymakers, making them less spontaneous in their remarks and less willing to explore new ideas.  Such an outcome would have adverse effects on policy decisions.  The Federal Reserve's current practices strike a reasonable balance between transparency and the degree of confidentiality appropriate to support the policy process.

Transparency has an important role in helping the public understand policy intentions and policy goals. However, transparency should not be allowed to interfere with the decision-making process itself...One extreme form of transparency would be simply to televise the meeting at which the discussion takes place. My concern about that suggestion is that it would inhibit discussion, that it would affect the decision process, that it would create volatility in financial markets. 

In 2003, there was an episode where there was clearly a miscommunication between the Federal Reserve and the bond markets, and it caused a significant fluctuation in the bond markets. This was over the issue of whether or not there was some risk of deflation coming forward. And clearly there was a misunderstanding about that risk. It impressed on me the importance of speaking clearly and communicating clearly and making sure that there's understanding on both sides about what the Fed is saying and what the Fed is intending to do.

Under Chairman Greenspan, monetary policy has become increasingly transparent to the public and the financial markets, a trend that I strongly support...One possible step toward greater transparency would be for the FOMC to state explicitly the numerical inflation rate or range of inflation rates it considers to be consistent with the goal of long-term price stability...I view the explicit statement of a long-run inflation objective as fully consistent with the Federal Reserve's current policy approach, including its appropriate emphasis on the role of judgment and flexibility in policymaking.  Most important, this step would in no way reduce the importance of maximum employment as a policy goal. Indeed, a key justification for this action is its potential to contribute to stronger and more stable employment growth by further stabilizing inflation and inflation expectations. In any case...if I am confirmed, I will take no precipitate steps in the direction of quantifying the definition of long-run price stability. This matter requires further study at the Federal Reserve as well as extensive discussion and consultation.