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.

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.”

The full rational expectations macroeconomic equilibrium occurs when the market behaves as the Federal Reserve expects and the Federal Reserve behaves as the market expects... The paradigm of a full rational expectations macroeconomic equilibrium sets the framework for communications strategy. From the Federal Reserve’s point of view, policy effectiveness will be enhanced when the market has a complete and accurate understanding of the Federal Reserve’s goals and policy processes.

Asymmetric information. A feature of many market environments is that some agents in the market have more information than others do. In the monetary policy context, the Federal Reserve has the largest and most extensive economic information gathering system in the world.  The Fed not only has a large staff but also has access to considerable confidential information from individual firms. To some extent this confidential information can be disclosed in summary form without identifying individual firms, but nevertheless the Fed’s timely access to this information and knowledge of the firms involved does give the Fed an advantage over the market in general.  However, the information asymmetry is not totally one-sided.  Individual firms have enormous specialized market information that the Fed does not have. For example, large retail firms have day-by-day and even hour-by-hour information on the scale of retail transactions in the economy; large banks and credit card companies have information on day-by-day economic activity as they observe flows of transactions on their own books.  The relevant economy-wide reports constructed by government statistical agencies come out with a lag measured in weeks to a month or more.  These formal statistical reports are the primary source of Federal Reserve information, and they are available to everyone in the market.  Although there certainly is an issue of asymmetric information, my own view is that asymmetric information is not a major issue for Fed communications policy.

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.

An increase in the intended rate of 25 basis points between scheduled meetings has a very different meaning than the same size increase at a scheduled meeting. To reduce uncertainty over the meaning of intermeeting policy actions, the FOMC could adopt an explicit policy of making all policy adjustments only at scheduled meetings unless there were a compelling circumstance to act between meetings. The compelling circumstance ordinarily could be easily explained; indeed, the event triggering a policy response would probably be highly visible and the policy response occasion no market surprise.

Another explicit understanding could be that all policy adjustments will be in increments of 25 basis points, unless compelling reasons argue for larger moves.

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.

But if the federal funds rate path becomes less predictable than it has been over the last 14 FOMC meetings, does that mean that the Committee must retreat to saying little beyond announcing its rate decisions when they are made? In my opinion, no. My sense is that there will still be room for forward-looking communications that entail more conditional statements about how policy is likely to react to evolving economic fundamentals, in contrast to the less conditional statements common since 2003.

[I]n any area of central bank communication, in some ways the critical thing for us to do is not to leave you with less uncertainty than we have about what we know about what's happening.  And we try to be very careful not to convey more confidence than we could reasonably have about what's happening to the forecast, and what that means for - for monetary policy.

From audience Q&A session

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.

The sentences about where policy is likely to go reflect the Committee's best estimates.  And best estimates, of course, are always subject to revision.  So I want to emphasize that, in my view, the Committee must always have the flexibility to respond to changing circumstances.

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.