An extensive literature and some recent experience suggest that central bank communications may also play a helpful role in addressing the constraints relating to the zero-bound... [T]he FOMC can work around the zero lower bound on the overnight interest rate by lowering interest rate expectations in the future, thus pushing down longer-term interest rates to stimulate private spending. The Fed employed such an approach between 2003 and 2005, and has taken an important step along the same path in its December announcement by stating that "exceptionally low levels of the federal funds rate" are likely to be warranted "for some time" due to "weak economic conditions." I believe that such statements can play a useful role in more clearly indicating to markets the Committee's own expectations concerning the federal funds rate path, conditional on the Committee's economic forecast.

Communication also can be important in the Fed's efforts to anchor long-term inflation expectations. As I mentioned at the outset, the odds are high that over the next few years, inflation will decline below desirable levels. It is especially important in such circumstances for the Fed to emphasize its commitment to returning inflation over time to the higher levels that are most appropriate to the attainment of its longer-term objectives. A decline in inflationary expectations when economic conditions are weak is pernicious, especially so when the federal funds rate has reached the zero bound, because any downdrift in inflation expectations leads to an updrift in real interest rates and a tightening of financial conditions.

While we at the Fed pride ourselves on always conducting extensive, thorough analyses of all economic issues, our efforts to analyze the current situation and design appropriate policy initiatives are probably unprecedented in scope. But policymakers face another very important challenge: In a complex and dynamic environment, the public needs effective and transparent communications. As our lending facilities and other policy responses continue to evolve, this is a daunting task.

...

I think the communications response must be to "never give up." We need to work very hard to explain the risks that we are facing and the rationale for why we think our policy actions best address those risks. As I alluded to earlier, much digital ink has been spilled in these attempts so far. More is on the way. If ink were fiscal stimulus, we might see a more rapid economic recovery in 2009.

A strong nominal anchor can be especially valuable in periods of financial market stress, as we have been experiencing recently, when prompt and decisive policy action may be required to minimize the risk of a severe contraction in economic activity that could exacerbate uncertainty and financial market stress.¹²  Thus, the establishment of an explicit numerical inflation objective can play an important role in promoting financial stability as well as the stability of employment and inflation.
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I would like to suggest several specific modifications to the Federal Reserve's current communication strategy.

• First, the horizon for the projections on output growth, unemployment, and inflation should be lengthened.  This change might involve simply an announcement of FOMC participants' assessment of where inflation, output growth, and unemployment would converge under appropriate monetary policy in the long run.  Alternatively, the horizon for the projections could be extended out further, say to five or more years.
• Second, FOMC participants should work toward reaching a consensus on the specific numerical value of the mandate-consistent inflation rate, and this consensus value should be reflected in their longer-run projections for inflation.²⁵
• Third, the FOMC should emphasize its intention that this consensus value of the mandate-consistent inflation rate would only be modified for sound economic reasons, such as substantial improvements in the measurement of inflation or marked changes in the structure of the economy.

In my view, the length of the forecast horizon is particularly relevant at the current juncture in considering the projections for output growth and unemployment.  Because of the recent adverse shocks to the economy--including turmoil in financial markets and the sharp increase in the prices of oil--output growth in recent quarters has fallen below potential, and the unemployment rate is, as best as I can judge, above the natural rate.  Similarly, sharp increases in the prices of many commodities have driven inflation above rates consistent with price stability.  Even under appropriate monetary policy, Committee forecasts of inflation, output growth, and unemployment might not settle at their respective long-run rates within the three-year horizon, obscuring Committee participants' views about these key parameters.

This problem may currently be somewhat less acute for the current set of inflation projections, because inflation is projected to moderate to about 2 percent or below by the end of the projection period.  Nevertheless, to the extent that some slack in economic activity is projected to persist through 2010, that slack might well induce a modest further decline in inflation, implying that policymakers' projections for inflation in 2010 might be a bit higher than their assessments of the mandate-consistent inflation rate. 

The FOMC has chosen not to announce such a quantitative guideline, although many past and current participants on the Committee have expressed individual preferences or “comfort zones” about ranges of inflation that they personally feel are appropriate objectives for policy. Within the past year, the FOMC has started publishing the ranges and central tendency of the inflation forecasts of the participants on a three-year horizon. These forecasts generally have been consistent with the revealed “comfort zones.” In the media, midpoints of these forecasts are often associated with an implicit FOMC objective for trend inflation. This represents important progress concerning the transparency of the FOMC inflation objective. Still, there is some risk that if the evolving inflation situation appears inconsistent with the inflation objective that is inferred from the revealed preferences of the individual FOMC participants, the anchor for inflation expectations may start to drag or come completely loose.

I do believe, however, that lender-of-last resort policies should take a lesson from what we have learned from the theory of monetary policy. In particular, policy should have important rule-like features. Specifying in advance the conditions or states of the world under which the central bank will lend is an essential first step. But policy must also make credible commitments to act in a systematic way consistent with explicit ex-ante guidelines. Discretion in lending practices runs the risk of exacerbating moral hazard and encouraging financial institutions to take excessive amounts of risk. Nevertheless, the issue of trading off financial stability and moral hazard will likely remain. 

The dramatic recent expansion in Federal Reserve lending raises the possibility that market participants view future access to Fed credit as having been substantially broadened. For evidence, market participants could point to the fact that entities formerly viewed as unlikely to have access to the discount window, such as the primary dealer subsidiaries of investment banks, have now been granted access...In my view, there is value in communicating policy intentions clearly. Deliberate imprecision — the so-called "constructive ambiguity" approach — leaves it to market participants to draw inferences for future policy from our past actions. Without an articulated statement of intention regarding lending policy, the time consistency problem is likely to be a difficult challenge because it will be hard to resist the future temptation to mitigate financial market stresses when they arise.

Beyond that, the central bank's historical role as a lender of last resort places it squarely in the center of financial disruptions as they unfold. We are perhaps not as close to a consensus on the proper conduct of this role as we are with regard to price stability. But as we continue to learn about the causes and nature of financial instability, I believe we should strive for policy that is informed by the lessons learned in the achievement of price stability. Chief among those is that a central bank can achieve better outcomes if it can establish credibility for a pattern of behavior consistent with achieving its long-term goals.

I am pleased and honored to be invited back by the students of Harvard. Our speaker in 1975 was Dick Gregory, the social critic and comedian, who was inclined toward the sharp-edged and satiric. Central bankers don't do satire as a rule, so I am going to have to strive for "kind of interesting."

Our deliberations are quite civil. I defy you to find any place in government that operates that efficiently ... I think perhaps it is the last deliberative body that is totally civil.  
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I don't ever feel restrained speaking as a Federal Reserve official. I don't have to clear my speeches ... I think that's unique.

From Q&A as reported by Market News International

...[G]lobalization requires us to expand the amount of information we consider in our policy-making process. Second, our ability to accurately interpret price statistics affects our ability to communicate effectively with the public. Effective communication helps us anchor inflation expectations. Lapses in our ability to convey accurate and timely information about the underlying nature of price changes can create uncertainties about central bank objectives, damage our credibility, and impose costs on the economy. 

My recommendation is that you take it [the April 30 FOMC statement] at face value. There are risks on both sides. There are tail risks, as the economists like to call them, on both sides.

We're in the business of risk management in that sense. We have a dual mandate. We have to (monitor) growth and inflation. The readers can study our entrails all they want. That's what makes it interesting. It says what it says, and that's all I'm going to say.

One of the biggest innovations came in 1994 when the FOMC began to disclose what its policy decision was after each meeting. The communication since then, however, has sometimes been a bit muddled. I don’t think there is a settled view in the FOMC about the value of essentially forecasting policy, or trying to give hints about where you’re going to go. I’ve become skeptical of that approach because I think the correlation between where you go and where you can see yourself going in advance is very low. … I also think that there is unfinished business with regard to clarity of objectives. I’ve been an advocate since the first day I came here of a formal inflation target, and that issue is still unresolved. There is a huge amount of unfinished business in trying to define and communicate the Fed’s reaction function.

 think that, to too great an extent, we’ve been throwing information out there without being clear in our minds what the message is. … And the way I’ve made this point in several speeches is that the issue is not transparency, but communication. Transparency implies that you throw back a curtain and let everybody look in. We too often dump the data without explaining what to make of it and why we’re doing it. What we need to do is not increase the material that we put out there, but we need to increase the interpretation and explanation, and we need to clarify the message. I don’t think there is enough of that happening.

In discussing his  2005 "eighth inning" remark to CNBC.

"The lesson learned there was first of all, never go on television," he said. "But more importantly, Federal Reserve officials have to be more circumspect. People pay attention to what we say."