The Evolution of the Fed’s Communication Strategy
As the theory of bureaucratic behavior predicts, the Fed has incentives to hide its actions from the public and from politicians to avoid conflicts with them. In the past, this motivation led to a penchant for secrecy in the Fed, about which one former Fed official remarked that “a lot of staffers would concede that [secrecy] is designed to shield the Fed from political oversight.”* For example, the Fed pursued an active defense of delaying its release of FOMC directives to Congress and the public. However, as we have seen, in 1994 it began to reveal the FOMC directive immediately after each FOMC meeting. In 1999, it also began to immediately announce the “bias” toward which direction monetary policy was likely to go, later expressed as the balance of risks in the economy. In 2002, the Fed started to report the roll call vote on the federal funds rate target taken at the FOMC meeting. In December 2004, it moved up the release date of the minutes of FOMC meetings to three weeks after the meeting from six weeks, its previous policy. The Fed has increased its transparency in recent years, but it has been slower to do so than many other central banks. One important trend toward greater transparency is the announcement by a central bank of a specific numerical objective for inflation, often referred to as an inflation target, which will be discussed in the next chapter. Alan Greenspan was strongly opposed to the Fed’s moving in this direction, but Chairman Bernanke is much more favorably disposed, having advocated the announcement of a specific numerical inflation objective in his writings and in a speech that he gave as a governor in 2004.† In November 2007, the Bernanke Fed announced major enhancements to its communication strategy. First, the forecast horizon for the FOMC’s projections under “appropriate policy” for inflation, unemployment, and GDP growth, which were mandated by the Humphrey Hawkins legislation in 1978, was extended from two calendar years to three, with long run projections added in 2009. Because projections for inflation given appropriate policy should converge to the desired inflation objective eventually, the long run projections provide more information about what individual FOMC participants think should be the objective for inflation. This change therefore moves the FOMC closer to specifying a numerical objective for inflation. Second, the committee now publishes these projections four times a year rather than twice a year. Third, the release of the projections now includes narrative describing FOMC participants’ views of the principal forces shaping the outlook and the sources of risks to that outlook. Although these enhancements to Fed communication are major steps forward, there are strong arguments that further increases in transparency could improve the control of inflation by anchoring inflation expectations more firmly, and help stabilize economic fluctuations as well.‡