Greater transparency with regard to Federal Reserve actions encourages public discussion and informed scrutiny, important aspects of accountability in a democratic society.  Transparency also enables financial markets to better predict monetary policy decisions, which can contribute to improved policy outcomes.  However, providing more complete information about policy decisions is not without cost.  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.

To the extent that the future course of monetary policy becomes less obvious, forthrightly communicating not only the actions we take but the reasons we take them will be essential to maintaining our credibility.

The economy will function more efficiently if the markets and the Fed are interpreting incoming data the same way.  If the Fed and the markets have the same view as to the policy implications of new information, then the market will be able to predict Fed policy adjustments accurately.

Policy decisions, whether or not including a fed funds target change, taken at regularly scheduled FOMC meetings, particularly since February 1994, have generated little if any news in the federal funds futures market.  Such decisions have been well anticipated by market participants.

In some instances, the injection of liquidity ran counter to the inflation risks that the Committee perceived just before the crisis.  But as events bore out, such flexible monetary policy responses did not jeopardize the pursuit of our long-run goal of price stability.  An important element in this disciplined approach to flexibility is that our long-run policy goals generally have been clearly articulated and are understood by the public.

So the Fed's best strategy is to keep careful watch on economic developments, approach each policy decision with an open mind, and communicate the rationale for its decisions as clearly as possible.

An effective monetary policy may well have been one factor in the great moderation of inflation and business cycles that I mentioned earlier. And our efforts in recent years to make the policymaking process more transparent may, almost by definition, have reduced uncertainty and thus compressed risk premiums.

The evolution to greater transparency proceeded step by step during the Greenspan years.  The most important single change was that the Fed began to disclose its decisions on the target fed funds rate in 1994.

I strongly believe that all of these [recent] measures to increase transparency have improved the effectiveness of policy.  A natural next step for the FOMC is to contemplate providing even clearer guidance to markets by announcing an explicit numerical long-run inflation objective.

I think the right approach to dealing with uncertainty is for policymakers to increase the clarity with which they convey to the public both monetary policy objectives and strategy. Monetary policy affects the economy not primarily through short rates, but instead through its effects on asset prices, including bond rates and equity prices. If financial markets have a good understanding of the central bank’s objectives and strategy, they will react appropriately to policy moves. This allows markets and policymakers to work together rather than at cross purposes—strengthening the transmission mechanism and shortening policy lags.

[An explicit numerical inflation objective or range] would be helpful for the FOMC because it would facilitate both internal discussions and external communication. More importantly, it could help anchor the public’s expectations.

I would argue that the Federal Reserve's ongoing process of transparency may also reflect the highly developed state of our financial markets and a growing recognition that, against that financial backdrop, shaping the expectations of market participants can on occasion be an important adjunct to monetary policy.

The Fed can maintain the credibility of its commitment to price stability and avoid sharp changes in public expectations about monetary policy by being as transparent as possible about its own decision-making.

Increasing the degree of central bank transparency is one reason I and some of my colleagues have spoken in favor of an explicit inflation-targeting program. I believe we have reached a point where institutionalizing inflation targeting simply makes good sense from an economic perspective. In short, it is a reasonable next step in the evolution of U.S. monetary policy, and it would help secure full and lasting benefits from our current stable price environment

Although statements in recent years reflect considerable continuity, changes usually come as a surprise to the market, and the initial meaning of new phrases has not always been clear. For that reason, I think the FOMC could improve clarity, especially when policy direction changes, by agreeing in advance on stock phrases to describe different situations.