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.   

Under Chairman Greenspan, talk and action were combined to ensure the markets that over a period of time -- not necessarily within a quarter or two-quarters, but over a period of time, perhaps lasting several years, the Fed would ensure that inflation was stabilized in a region that was consistent with the objective of price stability.
So that is the approach I would take. I would certainly not try to return inflation to a target within a short period of time. I would simply try to assure the markets that over a long period of time that the Federal Reserve was committed to price stability as a central part of its monetary strategy.

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.

Monetary policy is most effective when it is as coherent, consistent, and predictable as possible, while at all times leaving full scope for flexibility and the use of judgment as conditions may require.

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.

The federal funds futures market and other markets...provide a rich source of information to better understand the effectiveness of the Fed's changes in disclosure policies over the Greenspan era.  It is quite clear that the markets understand Fed policy to a much greater extent than before.

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.

A moderate pace of continued tightening is a sensible outlook at this point and it's too soon to say when we're going to stop.

But the precise course the Fed takes very much depends on the precise course the economy takes. If signs emanating from the economy suggest that the economy is veering off its most likely course, we will need to consider altering the pace at which we move toward policy neutrality. At the moment, however, this does not seem to be the case.

Of course, there are potential costs to [inflation targeting]...One is the possibility of miscommunication regarding our dual objectives...Some may misinterpret the enunciation of a long run inflation objective as a down-weighting of the Committee’s mandate to foster maximum employment...The announcement of any numerical inflation objective should be made in the context of clear and effective communication of the Fed’s multiple goals.

As the conduct of monetary policy has changed over time, it has become increasingly important that the central bank communicate in an effective and transparent manner. The Federal Reserve's communications efforts are a work in progress, with several significant advances being implemented over the past few years.