speeches · October 5, 2004

Speech

William Poole · President

FOMC Transparency OzarkChapteroftheSocietyofFinancialServiceProfessionals Springfield,Missouri October6,2004 PublishedintheFederalReserveBankofSt.LouisReview,January/February2005,87(1),pp.1-9 Transparency is at the forefront of many BACKGROUND monetary policy debates today. The Thefirstformalmoveinthedirectionof Federal Open Market Committee transparencywasinitiatedbytheReserveBank (FOMC) has had several formal discus- ofNewZealand,whichin1990negotiatedan sions of communications issues in recent years, agreementwiththegovernmentofthatcountry, and the subject comes up fairly frequently in makingtheBankresponsibleformaintaining FOMC meetings and speeches by FOMC inflationwithinaspecifiedrange.Hence,the members.1 ReserveBankofNewZealandwasthefirstcentral Itishardlysurprisingthatcentralbankersare banktobetransparentaboutitspolicyobjective. moretalkativethantheywerejustadecadeorso TheReserveBankofNewZealandhasbeena ago—andmoreconcernedabouthowtoimprove leaderontheothertwodimensionsoftransparency transparencyandcommunicationwiththemarket. aswell.Forsometimenowithasannouncedits Perhapsonlyoneissueissettled:Transparency settingofitspolicyinstrument—theofficialcash isimportantbutishardtoaccomplishbecause rate.TheBankalsopublishes,onasemiannual miscommunicationissoeasy.Clearly,moretalk basis,itsforecastsoveraseveral-yearhorizonfor doesnotnecessarilymeangreatertransparency. anumberofeconomicvariables,includingthe Discussionsofmonetarypolicycommunica- 90-daybillrate.GiventhattheReserveBankof tionfrequentlycenteronthreedimensionsof NewZealandstatesthatthe90-dayrateisclosely transparency:(i)transparencyabouttheobjectives linkedtoitsofficialcashrate,theseforecastscome ofmonetarypolicy,(ii)transparencyaboutcurrent veryclosetoprojectingaconditionalcourseof monetarypolicyactions,and(iii)transparency monetarypolicyactions.ThustheReserveBank aboutexpectedfuturemonetarypolicyactions. istransparentonallthreedimensionsoftrans- I’llorganizemyremarksaroundthesedimensions. parencyIoutlinedearlier. Beforeproceeding,however,Iwanttoempha- Anumberofothercentralbankshavefollowed sizethattheviewsIexpressherearemineand theleadoftheReserveBankofNewZealandby donotnecessarilyreflectofficialpositionsofthe adoptingandannouncingspecificnumericinfla- FederalReserveSystem.Ithankmycolleaguesat tionobjectives.Thesecentralbankshavebecome theFederalReserveBankofSt.Louis,especially knownas“inflationtargeters.”Currentlyincluded BobRasche,seniorvicepresidentanddirectorof inthisgrouparetheBankofCanada,theReserve theResearchDivision,andDanThornton,vice BankofAustralia,theBankofEngland,andthe presidentintheResearchDivision,fortheirexten- centralbanksofAlbania,Brazil,Chile,Colombia, siveassistance,butIretainfullresponsibilityfor theCzechRepublic,Georgia,Hungary,Iceland, errors. Israel,Mexico,Norway,Peru,thePhilippines, 1 ImyselfgaveaspeechonthesubjectinAugust2003:“FedTransparency:How,NotWhether.”ThespeechwaslaterpublishedintheFederal ReserveBankofSt.LouisReview,Vol.85,No.6(November/December2003,pp.1-7). 1 MONETARYPOLICYANDINFLATION Poland,Serbia,SierraLeone,SouthAfrica,South calledtheRecordofPolicyActions,whichwas Korea,SriLanka,Sweden,Switzerland,Tanzania, releasedwithrelativelylittledelay.TheMemor- Thailand,andTurkey.Alloftheseinstitutions andumwasasetofcompleteminutes,identifying aretransparentwithrespecttotheirmonetary speakers,butnotintheformofaverbatimtran- policyobjectives.Moreover,allofthesecentral script.TheRecordofPolicyActionsreportedthe banksannouncechangesinthesettingsoftheir Committee’sdecisionsandprovidedasummary policyinstrument(typicallyashort-terminterest oftheCommittee’sdeliberations.However,the rate).Practicediffersfrominstitutiontoinstitution RecorddidnotidentifybynamewhichFOMC onthereleaseofforward-lookinginformation memberstookwhichpositions. suchasforecastsforfuturedevelopmentsinthe In1976,inresponsetoacourtsuitchallenging economy. thelegalityofdelayingthereleaseoftheMemor- ThepracticeoftheEuropeanCentralBank andum,theFOMCdiscontinuedpublicationof (ECB)differssomewhatfromthatofthe“inflation thatdocument.TheCommitteecontinuedto targeters.”TheECBoffersadegreeoftransparency publishtheRecordofPolicyActionsbutin1993 withrespecttoitsmonetarypolicyobjective— changeditsnameto“MinutesofFOMCMeetings.” theECBhasanannouncedgoalofkeepingthe OvertimethereleaselagontheRecord/Minutes inflationrateclosetobutbelow2percentper wasshorteneduntil,atthepresenttime,the annum“inthemediumrun.”However,theECB Minutesareavailabletwodaysafterthenext hasneverannouncedanexplicitdefinitionofthe scheduledFOMCmeeting. “mediumrun.”TheECBannounceschangesin Inthefallof1993,membersoftheFOMC itspolicyrates,butdoesnotdiscloseforecasts becameawarethattaperecordingsofallFOMC fortheEuropeanUnioneconomiesorminutes meetingssinceMarch1976hadbeenpreserved. ofpolicydiscussions. Thesetapeshadbeenmadetoassistwiththe TheFederalReserve’spracticeoftransparency preparationoftheRecordofPolicyActionsand hasevolvedovertime.Iwilldiscussthisevolu- toprovideaccurateinformationabouttheCom- tionaryprocesswithrespecttothethreedimen- mittee’sviewsoncurrentpolicytoseniorstaff sionsoftransparency.InoteattheoutsetthatI members.However,itwascommonlythought endorseunconditionallyonlythefirsttwodimen- withinandwithouttheFederalReservethatthe sionsoftransparency.ForreasonsIwillmakeclear tapesweredestroyedwhenthatprocesshadbeen later,forecastingfuturepolicyactionsisacompli- completed.ManyFOMCmemberswheresurprised catedissue;withoutdiscussingthecomplexities whentheylearnedthatthetapesstillexisted. andthenatureofpossiblepolicyforecasts,it Inresponsetocongressionalpressure,the wouldbemisleadingtoofferasimple“Isupport” FOMCagreedinFebruary1995torelease,witha or“Ioppose.” lagoffiveyears,verbatimtranscriptscreatedfrom thetapesofFOMCmeetingsandtotranscribe pastrecordingsasquicklyaspossible.Atthe THE EVOLUTION OF presenttime,publishedtranscriptsareavailable forallFOMCmeetingsfrom1979through1998. TRANSPARENCY AT THE Thetranscriptiscomplete,exceptforredactions FEDERAL RESERVE ofconfidentialmaterialrelatingtoindividualfirms Originally,theminutesoftheFOMCmeetings andforeigngovernmentsandcentralbanks.No werenotmadepublic.Inresponsetopassageof othercentralbankprovidessuchcompleteand theFreedomofInformationAct,whichbecame explicitrecordsofitspolicydeliberations. effectivein1967,theFOMCdividedtheminutes TheFOMChasnotadoptedaprecise,numeri- intotwodocuments.OnewascalledtheMemor- calstatementofitsmonetarypolicyobjectives. andumofDiscussion,whichwasreleasedwitha TheFederalReserveAct,asamended,requires five-yearlag.Theotherwasashorterdocument theBoardofGovernorsandtheFOMC“topromote 2 FOMCTransparency effectivelythegoalsofmaximumemployment, theCommitteehasnotaddressedthequestionas stablepricesandmoderatelong-terminterest towhatinflationratewouldmarkthelimitsuch rates.”TheFOMChasinterpreteditsobjectiveas thatasubstantialriseininflationabovethatrate theresponsibilitytoachievepricestabilityto wouldbeunwelcome. promotemaximumsustainableeconomicgrowth. ThetransparencyoftheFOMCwithrespect Incontrasttotheinflation-targetingcentral topolicyactionshasimprovedconsiderablyover banks,theFOMChasneverassociatedavalueor thepast10years.BeginningwiththeFebruary rangeofvalueswith“pricestability.”Chairman 1994meeting,theFOMCissuedapressrelease Volckereschewedquantitativespecificationsof attheconclusionofeverymeetingatwhicha pricestabilityinfavorofaless-specificdefinition. policyactionwasinitiated.Inspiteofthefact Ina1983lecture,Volckerputhispositionthisway: thatpolicyactionshadbeenformulatedinterms ofaspecificquantitativeobjectivefortheeffective Aworkabledefinitionof“reasonableprice federalfundsratesincethe1980s,theFOMConly stability”wouldseemtometobeasitua- beganincludingthequantitativefundsrateobjec- tioninwhichexpectationsofgenerallyris- tive(calledthe“intendedfederalfundsrate”)in ing(orfalling)pricesoveraconsiderable itsformaldirectivetotheFederalReserveBank periodarenotapervasiveinfluenceon ofNewYorkattheAugust1997FOMCmeeting.4 economicandfinancialbehavior.Stated BeginningwiththeMay1999FOMCmeeting, morepositively,“stability”wouldimply theFOMCissuedapressreleaseattheconclusion thatdecision-makingshouldbeabletopro- ofeachmeetingatwhichthereweremajorshifts ceedonthebasisthat“real”and“nominal” intheCommittee’sviewsaboutprospectivedevel- valuesaresubstantiallythesameoverthe opments.Thesestatementsincludedanindication planninghorizon—andthatplanning ofthepolicy“bias,”whichwaswidelyinterpreted horizonsshouldbesuitablylong.2 inthepressandinfinancialmarketsashinting atfuturepolicyactions. Subsequently,ChairmanGreenspanadopted AftertheJanuary2000FOMCmeeting,the essentiallythesamedefinitionofpricestability.3 policy“bias”inthepressreleasewasdroppedin Asmallsteptowardamoreexplicitstatement favorofa“balance-of-risks”assessment.The oftheFOMC’sinflationobjectivewastakenin statementfollowingtheSeptember2004FOMC 2003when,attheMayFOMCmeeting,the meetingreadasfollows:“TheCommitteeperceives Committeeindicatedthat“theprobabilityofan theupsideanddownsideriskstotheattainment unwelcomesubstantialfallininflation,though ofbothsustainablegrowthandpricestabilityfor minor,exceedsthatofapickupininflationfrom thenextfewquarterstoberoughlyequal.”To itsalreadylowlevel.”Thisstatementgivesahint provideguidanceonitsthinking,theCommittee abouttheviewofCommitteemembersofthelower mightassesstheriskofachievingoneortheother, endofatolerancerangeofmeasuredinflation. orboth,ofthegoalstobetiltedtotheupsideor Atthattime,inflation,asmeasuredbytheCom- downside. mittee’spreferred“core”personalconsumption Adoptionofthebalance-of-riskslanguage priceindex,wasapproximately1percent.Todate, reflectedtheCommittee’sefforttoavoidconfusion 2 PaulA.Volcker,“CanWeSurviveProsperity?”RemarksattheJointMeetingoftheAmericanEconomicAssociationandtheAmericanFinance Association,SanFrancisco,December28,1983,p.5. 3 Seeforexample,AlanGreenspan,“TransparencyinMonetaryPolicy,”FederalReserveBankofSt.LouisReview,July/August2002,84(4),p.6. 4 However,startingwiththemeetinginJanuary1996,theCommittee’sstatementissuedafterameetingatwhichitchangedtheintendedfunds ratedidindicatetheanticipatedchangeinthefederalfundsrateinquantitativeterms:“Inarelatedmove,theFederalOpenMarketCommittee agreedthatthereductionwouldbereflectedfullyininterestratesinthereservemarkets.Thisisexpectedtoresultinareductioninthefederal fundsrateof25basispoints,fromabout5½percenttoabout5¼percent”(fromthestatementissuedJanuary31,1996). 3 MONETARYPOLICYANDINFLATION abouttheinterpretationofthewordingofthe federalfundsrateunderthe“measuredpace” “bias”statement,whichspecificallyreferredto statement. the“intermeetingperiod.”Thereplacementbal- ance-of-risksstatementfocusesonproviding insightintotheCommittee’sassessmentofthe WHY TRANSPARENCY? outlookforfuturerealgrowthandinflation,but Itisnaturaltoaskwhycentralbanksneedto fallsshortofprovidingafullfledgedforecastof betransparent.Oneansweristhatcentralbanks theeconomy.Alongwiththedecisiontoadopt aregovernmentalagenciesandassuchare thebalance-of-riskslanguage,theCommittee accountabletothepublicfortheiractions.As adoptedthepolicyofprovidingapressrelease laudableasitsounds,theaccountabilityargument aftereveryFOMCmeeting. onlygetsyousofar.Foryears,FederalReserve Anotherimportantsteptowardmore- officialsarguedthatimmediatereleaseofpolicy predictablepolicywasfortheFOMCtoconfine decisionswouldmakemarketsmoreunstableand policyactionstoregularlyscheduledmeetings. policyimplementationmorecostlyanddifficult; SinceFebruary1994,policyactionsotherthan creatingtheseeffectsthroughdisclosurewould ataregularlyscheduledFOMCmeetingoccurred obviouslybeinconsistentwiththeFed’spublic onlyinunusualcircumstances. responsibilities.5 Finally,inMay2003theCommitteeadded Viewsonwhetherimmediatereleaseofpolicy anadditionalsentencetothepressrelease:“In decisionswoulddamagemonetarypolicyhave thesecircumstances,theCommitteebelievesthat changed.Still,thesamebasicissueremains:How policyaccommodationcanbemaintainedfora dowedeterminewhatleveloftransparencyserves considerableperiod.”Thislanguagewasrevised thepublicinterest?Forexample,somehavesug- inJanuary2004to“theCommitteebelievesthat gestedthattheFOMCshouldconductitsdelibera- itcanbepatientinremovingitspolicyaccommo- tionsinpublic,perhapstelevisedonC-SPAN. dation.”AsecondrevisionoccurredinMay2004 Commonsenseandexperiencesuggest,however, to“theCommitteebelievesthatpolicyaccommo- thatsuchapracticewouldcurtailthefreeand dationcanberemovedatapacethatislikelyto openexchangeofideasthatcharacterizeFOMC bemeasured.”Thefirsttwoversionsofthissen- meetings. tencewerecommonlyinterpretedasplacingthe Anythingthatwoulddiminishtheeffective- Committeeonholdwithrespecttofuturepolicy nessofthepolicyprocesswouldbeinconsistent actions;thelastrevisionwaswidelyinterpreted withtheFedmeetingitsresponsibilities.Account- ashintingthattheintendedfundsratewouldbe abilityrequiresonlythatacentralbankbeopen raisedinasuccessionof25-basis-pointincrements. andhonestaboutitsobjectivesandbeheld Mostrecently,inJune2004,theCommittee accountableforachievingthoseobjectives.Cer- conditionedits“measuredpacestatement”with tainly,theultimatetestiswhetherdisclosure theadditionalsentencethat“theCommitteewill yieldsbetterpolicyoutcomes. respondtochangesineconomicprospectsas Therootsofcentralbanktransparencyare neededtofulfillitsobligationtomaintainprice foundnotonlyintheprinciplesofdemocratic stability.”Todate,theactionsoftheCommittee accountabilitybutalsoineconomictheory.The havebeenconsistentwiththepublicinterpreta- economicsoftransparencyisasubjectthatcan tionsofthesestatements;nochangesinthefunds bestudiedsystematically,usingallthetoolsof rateoccurredunderthe“considerableperiod”and moderneconomics.Botheconomictheoryand “patient”statements,andtherehavebeenthree experiencedemonstratethattheeffectsofmonetary increasesof25basispointseachintheintended policyontherealeconomy—realgrossdomestic 5 TheminutesoftheFOMCmeetingofJune20,1967,listsixreasonsfordelayedreleaseofinformation. 4 FOMCTransparency product,realinterestrates,theunemployment andduration,itisimportantthatthecentralbank rate,etc.—aretransient.Monetarypolicyactions betransparentaboutbothitsshort-runobjective onlyhavealastingeffectoninflation,although fortherealeconomyanditslong-runinflation uncertaintyaboutpolicycanincreaseshort-run objective.Transparencyshouldhelpmarketsto volatilityand,perhaps,damagetheeconomic makethebestpossibleadjustmentsovertimeand growthprocess.Insuchaworld,theroleofthe minimizeuncertaintyflowingfrommonetary market’sexpectationsaboutthecentralbank’s policyitself. objectiveforinflationistheprincipalreasonfor Considernowtheissueoftheinflation centralbanktransparency. objective.Whilethereiswidespreadagreement Hereiswherethestorygetsalittlecompli- amongpolicymakersandtheprofessionthatrapid cated,soitisusefultoconsidersomeextremeand inflation—suchastheinflationthatcharacterized unrealisticcasestoillustratethepoint.Consider the1970sandearly1980s—hasdamagingconse- aworldwheremonetarypolicyactionshaveno quencesfortherealeconomy,particularlythe long-runimpactonrealvariables,suchasthe long-termrateofeconomicgrowth,thereismuch unemploymentrate,butnoshort-runimpacteither. lessagreementontherateofinflationthatmaxi- Economictheorypredictsthisstateofaffairsifall mizesthelong-runrateofeconomicgrowth.That wagesandpriceswereperfectlyflexible.Insuch is,thereislittleagreementamongeconomists aworld,economicagentswouldrealizethatan andpolicymakersaboutthe“optimal”rateof easingofmonetarypolicywouldresultinhigher inflation.AttheJuly1996meetingoftheFOMC, prices.Knowingthisoutcome,priceswouldadjust inresponsetoaquestionbyGovernorYellenabout immediately:Policyactionswouldhavenoeffect thelevelatwhichinflationnolongeraffects ontherealeconomy. businessandhouseholddecisions,Chairman Ofcourse,inthereal-worldeconomy,prices Greenspanresponded,“zero,ifinflationisprop- arenotperfectlyflexible.Thisfeatureofmarket erlymeasured.”6 behaviormeansthatpolicyactionshaveshort-run Iagree.Giventheknownbiasesinprice effectsontherealeconomy.Apolicyproblem indices,however,exactlywhatthisdefinition arisesbecausepolicymakersdonotknowexactly impliesforinflationasmeasuredbythepersonal howmonetarypolicyactionsaretranslatedto consumptionexpenditure(PCE)priceindexor therealeconomicvariables;policymakersmust theconsumerpriceindex(CPI)isuncertain.Iam estimate,orguess,themagnitudeoftheresponse inclinedtobelievethatzeroinflationcorrectly ofsuchvariablestopolicychangesandhowlong measuredtranslatesintoabout1percentinflation theseeffectslast.Theonlycertaintyisthatthe forthePCEandabout1.5percentfortheCPI. effectsofpolicyactionsonrealvariableseventu- Thereismuchlessagreementintheprofession allydissipate.“Eventually”maycoveraperiodof abouthowmuchandhowlongrealeconomic severalyearsandmaybelongerinsomecircum- variablesareaffectedbypolicyactions.Thisdis- stancesthanothers.Itisworthnotingthatthese agreementisconfoundedbythefactthatthe hedgesonmypartreflectignorance—mineand effectsofmonetarypolicyontherealeconomy theprofession’s—andnotobfuscations.Wejust canbeinfluencedbyotherdevelopmentsover don’thavepreciseestimatesofthemagnitudes whichpolicymakershavenocontrol.Forexample, anddurationsofeffectsofmonetarypolicyon aparticularpolicymakermightarguethatagiven realvariables. easingofpolicywillnotshowinpricesforx Giventhatpolicyactionshaveatransient monthsiftherearenootherchangesintheecon- effectontherealeconomy,butalastingeffect omicenvironment.Thesamepolicymakerwould onlyonprices,andgiventhattheeffectsonthe likelyarguethatthisperiodwillbelongerifthe realeconomyareuncertaininbothmagnitude easinginpolicyisaccompaniedorfollowed 6 TranscriptoftheJuly2-3,1996,meetingoftheFOMC,p.51. 5 MONETARYPOLICYANDINFLATION closelybyamarkedincreaseinproductivity.If beingclear,orasclearaspossible,aboutalldimen- theincreaseinproductivitywerepermanent,this sionsofsuchanobjective.Ipersonallybelieve policymakermightarguethatthepolicyeasing thatitispossibletoaddressthesepracticalcon- mayhavenoeffectonthepricelevel:Indeed,the cernsandstateaninflationobjectiveinaneffec- riseinproductivitycouldmorethanoffsetthe tiveway.Butthatisasubjectforanotherday. policyactionssothat,inthelongrun,prices AlthoughtheFOMChasnotannounceda declineratherthanincrease,astheywouldinan preciseinflationobjective,ithastakenanumber unchangedeconomicenvironment. ofstepstobettercommunicateitsobjectives.The Itiseasytoseehowuncertaintyaboutthe FOMChasmadeitclearthatit“seeksmonetary magnitudeandtimingoftheeffectsofpolicy andfinancialconditionsthatwillfosterprice actions,combinedwithuncertaintyabouthow stabilityandpromotesustainablegrowthinout- otherfactorsimpactthemagnitudeandtimingof put.”Thisstatementclearlyindicatesthatthe theseeffects,canresultinsignificantdifferences Committee’spricestabilityobjectiveisconsistent ofopinionabouttheeffectsofmonetarypolicy. withsustainablegrowthinoutput.Whilereason- Thatmeansthattheremayalsobesignificant ablepeoplemaydifferonexactlywhatthisinfla- differencesofopinionabouttheextenttowhich tionrateis,veryfewwouldarguethatinflation policycanbeusedeffectivelytooffsettheeffects of4percentorhigherisconsistentwithmaximum ofsuddenshocks,orevolvinglong-runstructural sustainableoutputgrowth.Mostwouldchoosea changes,totherealeconomy. muchlowerrate. Giventhesereal-worlduncertainties,itis TheCommitteehasyettoformaconsensus importantforpolicymakerstobeasexplicitas onthecircumstancesandextenttowhichmone- possiblenotonlyaboutthecentralbank’slong-run tarypolicycanbeusedtooffsetshockstothereal inflationobjectivebutalsoaboutitsshort-run economywithoutendangeringitspricestability policyobjectives.Themoreambiguouspolicy- objective.TotheextentthatitrevealstheCom- makersareabouttheseobjectives,themorediffi- mittee’ssensitivitytoshort-runobjectivesofpolicy, cultitwillbeforthepublictodifferentiatepolicy thebalance-of-risksstatementisbeneficialinthis actionsthatmayreflectachangeinthecentral regard.Thebalance-of-risksstatementalsogives bank’slong-runinflationobjectivefromactions marketparticipantsasenseoftheCommittee’s intendedonlytooffsettheeffectsofrealshocks viewsonwhatitbelievestherisksareforitsshort- oneconomicactivity. runandlong-runobjectivesgoingforward. Ofcourse,uncertaintyabouttheinflation Thebalance-of-riskslanguageis,however, objectivecouldbereducedbyadoptingaspecific somewhatambiguous.Forexample,onemightask: numericallong-runinflationobjective.Real-world Iftherisksareunbalanced,whywaspolicynot experiencewithannouncedinflationobjectives adjustedtocreatebalancedrisksgoingforward? inothercountriesshowsthattheissueismore Oneansweristhatthereisnoneedthattheserisks complicatedthanitmightseem.Ifanobjective bebalanced.Theinflationobjectiveisalong-run isstatedasanumber,whatistheeffectiverange objective,whileotherobjectivesareshort-run. aroundthatnumber?Thatis,aninflationobjective Thereisnoeconomicrationaleforbalancingsuch statedas2percentmightinpracticemean1to3 objectives. percent.Istheobjectivetobemetoveratime Thebalance-of-risksstatementcanbemisin- horizonofsixmonthsortwoyears?Mightthe terpretedbecauseoftheprevailingviewthat objectivebetemporarilymodifiedinthefaceof employmentandinflationnecessarilyriseand specialcircumstances,suchasthe9/11attacks? falltogether.Infact,employmentandinflation, Beingclearaboutaninflationobjectivemeans ortheirchanges,arenothighlycorrelated.7A 7 WilliamPoole,“FedTransparency:How,NotWhether,”FederalReserveBankofSt.LouisReview,November/December2003,85(6),p.7. 6 FOMCTransparency scatterplotofthechangesinemploymentand aboutthefuturedirectionofpolicy,Iknowthat inflationrevealsthatthereisnostrongpositive thingscouldhappenthatwouldmakemechange relationshipbetweeninflationandemployment. mymind.Theterribleeventsof9/11illustrate Sometimestheymovetogether;sometimesthey thispointdramatically.Itwouldhavebeenirre- moveinoppositedirections.Consequently,inmy sponsiblefortheFedtocontinueonapresetpath, view,anunbalancedbalance-of-risksstatement ignoringthisevent. shouldnotbeinterpretedasanindicationofa Thus,forward-lookingFedpolicystatements futurepolicyactioninaspecificdirection.Unfor- shouldalwaysbeinterpretedasconditionalon tunately,itistooofteninterpretedthatwayby futureevents.Aforward-lookingstatementisnot marketparticipants.Byfailingtoclarifytheintent anironcladcommitmentbutratherastatement ofthisstatement,theFOMCtacitlysharesinthis ofbeliefbasedonwhatwenowknow.Itisunfor- confusion. tunatewheneversuchastatementisreadasa commitment.Theobjectiveorexpectedpathfor theintendedfederalfundsrateissetbasedonall STATEMENTS ABOUT FUTURE ofthecurrentlyavailableinformation—including expectationsoffutureevents.Ifthefutureturns POLICY outexactlyaspolicymakersanticipatedatthe In2000,theFOMCswitchedfromthe“tilt” timethepolicypathisset,therewillbenoneed languagetothebalance-of-riskslanguage,with toresetit.Onlywhennewinformationsuggests theexplicitintenttoavoidsignalingfuturepolicy thattheprevioussettingisnolongerconsistent actions.Nevertheless,inAugust2003theCom- withachievingtheobjectivesofpolicydoesthe mitteeaddedastatementthatwasintendedto Committeeneedtoadjustthesetting. givethepublicsomeideaofhowitbelievedpolicy Atanygiventime,thepolicypathIanticipate mightproceedinthenearfuture. maybeheldwithgreaterorlesserconviction.Put Ofnecessity,monetarypolicyismadewithan anotherway,itmaytakemoreorlessnewinfor- eyetothefuture—thereisnothingcurrentpolicy mationoutsidetherangeofwhatIhadanticipated candoaboutthepast.Becauseoftheinherently tochangemymindonthepath.Policydecisions forward-lookingnatureofpolicymaking,policy aresometimesclosecallsandsometimesnot.And, ismadewithanexpectationofhowfutureevents ofcourse,differentpolicymakersdonotallsee arelikelytounfold.Moreover,itisonlynatural thingsthesameway.Thecommunicationschal- thatpolicymakersassignahigherprobabilityto lengewithrespecttofuturepolicyistoconvey someeventsthantoothers.Insodoing,policy- accuratelyhowclearthelikelypolicydirection makersformjudgmentsaboutwhetheradditional is.Sometimestheexpectedpolicycoursemight movestotightenorloosenpolicyarelikelytobe bechangedonlyifmajorunforeseeneventsoccur desirable.Inourpresentsituation,theissueis andsometimesifanaccumulationofsmallerbits whetherpolicytighteningmightproceedmore ofnewinformationsuggestthatachangeinpolicy slowlyormorerapidlythanonemightotherwise isappropriate. anticipate. Giventheseambiguitiesandthedangerof Theissuewithsuchstatementsisthatthey misleadingthemarketwhenindicatingaprobable mightbemisinterpretedasafirmcommitment futurecourseforpolicy,Ihavegenerallybeen toproceedinaspecificway.Atanygiventime, opposedtoannouncing,orhintingat,futurepolicy policymakersmightfeelmoreorlesscertainabout adjustments.However,thisyear’ssituationis theprobabledirectionofpolicyincomingmonths, unusual.Whenthecurrentroundofpolicytight- butIthinkitsafetosaythattheyneverbelieve eningbeganlastJune,thetargetfortheintended thatfuturepolicyshouldbetotallyunresponsive federalfundsratewas1percent.Afterthreeadjust- toevents.NomatterhowfirmaconvictionIhave mentsof25basispointseach,theratenowstands 7 MONETARYPOLICYANDINFLATION at1.75percent.Whentheprocessstarted,there issubjecttodisputewithintheFOMC.Evenifan waslittledoubtinanyone’smindthata1percent agreementcouldbereached,communicatingit fundsratewassignificantlybelowthelong-run tothepublicwouldbedifficult.Indeed,ifthe equilibriumconsistentwithpricestability.Hence, probabilityoffuturepolicyactionweresufficiently therewaslittledoubtthat,overtime,theFOMC large,someobserversmightask,whywait;why wouldraisetheintendedfundsrate.Bysaying nottaketheactionnow? thatthepolicytighteningcouldproceedata Moreover,itisimportanttonotethatastate- measuredpace,theFOMCindicatedabeliefthat mentofprobablefuturepolicydirectionmayactu- economicconditionsgoingforwardlikelywould allybeamoreimportantpolicydecisionthan allowsteadyadjustmentsofthefundsrate thesettingofthecurrentintendedfederalfunds rate.Howeasywoulditbeforamembertoagree towarditslong-runequilibriumlevel. toapolicyactionontheintendedfederalfunds Astheprocesscontinues,obviously,the ratebutdissentoverthewordingofthepolicy intendedratewillintimereachalevelsuchthat statementindicatingaprobablefuturedirection itisnotsoclearanymorethatfurtherincreases topolicy?TheFOMCdecisionprocesscertainly areinorder,orthatfurtherincreasesshouldcon- includestheobligationofFOMCmembersto tinueatthesamepace.Themeasured-pacelan- dissentwhentheyhaveafundamentaldisagree- guageremainsintheFOMC’smostrecentpolicy mentwiththepolicydecision;thatprocessiswell statement,reflectingtheCommittee’sexpectation understoodtodaywithreferencetothedecision atitslastmeeting,inmid-September.Whatactu- ontheintendedfederalfundsrate.Tomaintain allyhappenswilldependoneconomicevents theintegrityofthedissentprocess,thepublic thataresubjecttowideforecastingerrors.Hence, willhavetounderstandthatdissentsmaybein itisimportantthemarketnotinterpretthisstate- orderoverthewordingofthepolicystatement,a mentasacommitment.Itispossible—Iwould possibilitythathasnotbeenwidelydiscussed. argue,likelyatsomepoint—thatnewinformation willcausetheFOMCtoadjustthetargetatapace differentfromwhatiscurrentlyanticipated.The CONCLUDING REMARKS pacecouldbefasterorslower,dependingonhow theeconomyevolves.Inanattempttounderscore Letmesummarizethisdiscussion.Thebasic thiseventuality,theCommitteeaddedasentence frameworkforpolicyisthattheFOMCsetsthe toitsJune2004publicstatementandreiterated intendedfederalfundsrateandindividualmem- itinAugustandSeptember.Thestatementread: bershaveinmindaprobablefuturecourseforthe “Nonetheless,theCommitteewillrespondto fundsrate.Theprobablefuturecoursemaybe changesineconomicprospectsasneededtofulfill prettyclear,ormaynotbe,dependingoncircum- itsobligationtomaintainpricestability.” stances.Committeemembersvoteontheintended Ibelievethatitisimportanttoprovideas fundsrateattheendofeachmeeting,buthistori- muchinformationaspossibleabouttherationale callyhavenotvoted,oreventriedtodevelopa forpolicyactions.Itmightbeusefultoprovide consensus,ontheprobablefuturedirectionof informationaboutlikelyfuturepolicyonaroutine policy.Membersunderstandthat,whatevertheir basis,butthedifficultiesofdoingsoshouldnot viewsaboutthefuture,actualpolicyactionsinthe beunderestimated. futurewillbeconditionaloninformationabout Foronething,theFOMCwillnotnecessarily theeconomythatcannotbeforecast.Whatthe agreeonthelikelihoodofafutureaction.Itmay FOMCdoesinthefutureisofnecessitydeter- beconfusingtothepublicifapolicydirectionis minedjointlybytheFOMC’spolicyobjectives indicatedaftersomeFOMCmeetings,whenthe andeconomiceventsastheyunfold. directionisprettyclear,andnotafterothermeet- TheCommitteehasanobligationtobeclear ings,whentheprobabledirectionisnotclearor aboutitspolicyobjectivesandshouldannounce 8 FOMCTransparency anychangesinthoseobjectives.Infact,thereisa broadpublicconsensusabouttheseobjectives andIwouldbesurprisediftheobjectiveschange inanymaterialwayinthefuture.Objectivesmay beclarified,butIdonotanticipatesignificant change. Withclarityoverobjectives,theFOMCneeds toactinasconsistentawayaspossibleinpursuit oftheobjectivesandtoexplaintheprocessas clearlyaspossible.Whentheprocessiswell understood,itisunlikelythatpolicyactionswill takethemarketbysurprise.Thesepolicyactions willtypicallybedrivenbythearrivalofnewinfor- mation,whichcouldnotbeforecastaccurately atthetimeofpreviousFOMCmeetings. Ininstanceswherethemarketappearstomis- interprettheobjectivesortheintentofaparticular action,theFOMCmustendeavortoclarifyits intention.Butmoreimportantthandealingwith individualepisodesisongoingdiscussionabout monetarypolicy.Adangerinrelyingonthe FOMC’sownforecastsofitspolicydirectionis thatthemarketwillfocusontheseforecastsand notontheunderlyingrationale.Werethatto happen,themarketwillinevitablybesurprised wheneventsrequirepolicyactionsthatdiffer fromtheFOMC’sownforecasts. Nowthatyou’veheardmyargument,I’msure youwillagreethattransparencymaysoundeasy, butisnot. 9

Cite this document

APA

William Poole (2004, October 5). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20041006_poole

BibTeX

@misc{wtfs_speech_20041006_poole,
  author = {William Poole},
  title = {Speech},
  year = {2004},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20041006_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}