Some central banks hold regular press conferences. And, of course, some have established explicit numerical objectives - or inflation targets - and publish economic projections that clearly show what they are aiming at and how they expect to get there. Our different approaches are, in part, a result of our different histories and governance structures.  But also, I think, central banks are still developing "best practices" for securing inflation expectations in the face of unknown future risks.

However, differences in tactics should not be confused with differences in intent. I believe that my colleagues - and indeed, most central bankers today - are working to achieve the same end. We are all trying to create an environment in which inflation is so low and stable that it does not influence the decisions that households and businesses would otherwise make.

I can assure you that every word and every nuance in our communications are carefully considered. It is essential that the public understand our interpretation of the economic situation and that they support our policies. In a very real sense, our communications have become a part of the policy process, because we understand that influencing inflation expectations is an important dimension of monetary policy.

[I]n many countries inflation expectations seemed to shift when the central bank adopted inflation targeting. Public understanding of the central bank's long-run goals and of how the central bank would respond to various potential economic disturbances helps anchor inflation expectations.

A variety of expectations measures then, point to expectations for core PCE inflation of about 2 percent right now. What does this imply about the outlook for actual inflation, which is now running at about 2¼ percent? The current level of inflation expectations is likely to exert a gravitational pull on actual inflation, if monetary policy actions are not inconsistent with those expectations and no concerted effort is made to shift expectations...

Could inflation fall below 2 percent, say to 1½ percent? That depends. Without a prompt fall in inflation expectations, a reduction in inflation below 2 percent is likely to be temporary and hard to sustain. With expectations left alone, the remaining mechanism for bringing down inflation is the traditional Phillips curve mechanism, that is, an increase in real interest rates that slows aggregate demand and reduces both inflation and real activity...

The prospects for bringing inflation down below 2 percent thus hinge on the extent to which a reduction in inflation expectations can be brought about. How difficult would that be? Using changes in the target interest rate alone, the process is likely to be difficult and time-consuming...

One natural approach to bringing inflation expectations down more expeditiously, should that be the desire, would be a strategy of clear communications about policymakers' intentions.

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.

I regard “price stability” as zero inflation, properly measured. What does “properly measured” mean? Price indexes have biases of various sorts and experts generally believe that U.S. indexes overstate inflation by a modest amount. If statisticians understood these biases with precision, the indexes could be corrected. I myself make a rough guess that, for example, the Consumer Price Index overstates inflation by about one percentage point a year.

...In recent years several FOMC members have referred to a “comfort zone” of 1-2 percent inflation measured by the price index for personal consumption expenditures, excluding the volatile food and energy components. Because agreement on some reasonably low rate of inflation is more important than exactly what that rate is, I am perfectly happy to state my personal inflation objective as an inflation rate measured by the core PCE price index of 1.5 percent, plus or minus 0.5 percent.

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

In answering audience questions earlier, Poole spoke about how observers can judge whether or not the Fed will intervene in economic crises. "The goal ought to be to be able to write something [rules for intervention] down in a formal fashion," Poole said. "We're not there yet but I'll tell you there's much more predictability than you might realize and ... there are events that can happen where you won't have any doubt as to how the fed is going to respond." He cited the failure of Long Term Capital Management and 9/11 as an examples where uncertainty was rampant and spreads "moved to a surprisingly large extent."

As reported by Market News

To the extent that Federal Reserve communications leave the impression that high frequency observations are of great value, then this is something which I think we need to address.  In my experience, a considerable accumulation of evidence usually is required before it is wise to change your view.
  

Inflation targeting is a communication tool. This issue is under review in the committee.  I personally believe that setting a numerical inflation objective does help communication both within the committee and externally.

During Q&A discussion, as reported by Bloomberg News

The issue of expectations illustrates our ignorance.  As I have already indicated, inflation expectations are among the most important variables policymakers monitor, but we do not have answers to our most basic questions about them:  Are available measures suitable indicators of true inflation expectations by households and businesses?  How are expectations formed--and in particular what are the respective roles of central bank talk, central bank actions, and actual inflation outcomes?  And how do expectations influence price and wage setting?  In short, although I believe that inflation expectations are critical to assessing the inflation outlook, I cannot be sure (particularly in real time) that our expectational measures are accurate and so cannot know what precise role expectations play in wage and price dynamics.  

I should say that I view inflation objectives and the like as being part of the communication tool kit that a central bank may have to try to explain to the markets and to the public what its approach is, what its plans are and how it sees the economy.

We are currently, in the Federal Open Market Committee, conducting a zero-based review of our communications policies, looking at, among them, numerical objectives for inflation, but many other approaches as well, to try to provide more information to the public about our plans and our approach.

So in terms of specifics, I think I would leave that open because our committee has not yet decided what approaches we want to take.

From the Q and A session

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.

In my opinion, there has been a discrepancy lately between the views of the FOMC members, as summarized in the Committee’s public statements, and the views of many financing market participants.  Although there is a wide range of views in the market, some participants have jumped to the conclusion that monetary policy will be eased in the near future.  Surveys of financial market economists show that many expect an easing in monetary policy sometime this year.  In addition, the yield curve and financing futures prices incorporate some expected easing of monetary policy later this year.

In contrast, the FOMC has continued to express its concern about upside inflation risks. After its last meeting on December 12, the FOMC stated that “some inflation risk remain” and that “the extent and timing of any additional firming” would depend on how incoming data affected the outlook for growth and inflation.  

In my view, the easing of monetary policy that market participants expect would be appropriate only if inflation clearly subsided from recent elevated levels, and if the incoming data implied the inflation outlook would remain favorable in the future.  In my judgment, it is premature to conclude that current conditions define a clear path for policy.

[T]here is a further reason why I believe that a central bank should not put too much focus on asset prices. Such a focus can weaken its public support, making it harder for it to successfully conduct monetary policy to stabilize inflation and employment.

A central bank that focuses intently on asset prices looks as if it is trying to control too many elements of the economy. Part of the recent successes of central banks throughout the world has been that they have narrowed their focus and have more actively communicated what they can and cannot do. Specifically, central banks have argued that they are less capable of controlling real economic trends in the long run and should therefore focus more on price stability and damping short-term economic fluctuations. By narrowing their focus, central banks in recent years have been able to increase public support for their independence. A central bank that expanded its focus to asset prices could potentially weaken its public support and may even cause the public to worry that it is too powerful and has undue influence over all aspects of the economy.