Below is a prepared speech given by Federal Reserve Chairman Ben Bernanke on Federal Reserve communications at the Cato Institute 25th Annual Monetary Conference in Washington, D.C. on November 14, 2007:
The more fully the public understands what the function of the Federal Reserve System is, and on what grounds its policies and actions are based, the simpler and easier will be the problems of credit administration in the U.S.
– Federal Reserve Board, Annual Report, 1923, p. 95.
Montagu Norman, the Governor of the Bank of England from 1921 to 1944, reputedly took as his personal motto, "Never explain, never excuse." Norman's aphorism exemplified how he and many of his contemporaries viewed the making of monetary policy--as an arcane and esoteric art, best practiced out of public view. Many central bankers of Norman's time (and, indeed, well into the postwar period) believed that a certain mystique attached to their activities and that allowing the public a glimpse of the inner workings would only usurp the prerogatives of insiders and reduce, if not grievously damage, the effectiveness of policy.
Norman's perspective on central banking now seems decidedly quaint. Over the past few decades, central banks around the world have worked assiduously to become more open about their activities. In fact, Norman's own institution, the Bank of England, has in recent years been a leading exponent of increased transparency in central banking. Monetary policy makers have adopted a range of methods to improve their communication with the public, including timely announcements of policy actions, expanded testimony before members of the legislature, the release of minutes of policy meetings, frequent public speeches, and the regular publication of reports about the economy and monetary policy. This increased openness is a welcome development for several reasons. Most importantly, monetary policy makers are public servants whose decisions affect the life of every citizen; consequently, in a democratic society, they have a responsibility to give the people and their elected representatives a full and compelling rationale for the decisions they make. Good communications are a prerequisite if central banks are to maintain the democratic legitimacy and independence that are essential to sound monetary policy making.
In addition, a considerable amount of evidence indicates that central bank transparency increases the effectiveness of monetary policy and enhances economic and financial performance in several ways. First, improving the public's understanding of the central bank's objectives and policy strategies reduces economic and financial uncertainty and thereby allows businesses and households to make more-informed decisions. Second, if practitioners in financial markets gain a better understanding of how policy is likely to respond to incoming information, asset prices and bond yields will tend to respond to economic data in ways that further the central bank's policy objectives. For example, if market participants understand that arriving information about the economy increases the likelihood of certain policy actions, then market interest rates will tend to move in a way that reinforces the expected actions, effectively supporting the goals of the central bank. Third, clarity about the central bank's policy objectives and strategy may help anchor the public's long-term inflation expectations, which can substantially improve the efficacy of policy and the overall functioning of the economy. Finally, open discussion of the central bank's analyses and forecasts invites valuable input and feedback from the public.
The benefits of an open and accountable policymaking process have spurred the Federal Reserve, along with other major central banks, to take a number of actions over the years to increase its transparency. Appropriately, given the unique position of the Federal Reserve and the sensitivity of financial markets to its communications, these steps have generally been incremental in nature; but, taken together, they have substantially increased the ability of the American public to understand and to anticipate monetary policy decisions.
The Congress has also long been aware of the importance of Federal Reserve transparency and accountability; in particular, a series of resolutions and laws passed in the 1970s set clear policy objectives for the Federal Reserve and required it to provide regular reports and testimony to the Congress.1 Since 1975, the Federal Reserve has presented testimony twice each year to the Congress on the conduct of monetary policy. These semiannual presentations have become an important vehicle for the U.S. central bank to make known its views on the outlook and on the appropriate stance of policy. Other notable milestones in the Federal Reserve's progress toward greater openness include: in 1979, the first release of semiannual economic projections; in 1983, the first publication of the Beige Book, which summarizes information about economic conditions received from the Federal Reserve System's business contacts; in 1994, the decision to release a postmeeting statement when policy actions had been taken; in 2000, the beginning of the practice of issuing a statement after each meeting of the Federal Open Market Committee (FOMC) and including in the statement an assessment of the balance of risks to the Committee's objectives; in 2002, adding the FOMC roll call vote to the postmeeting statement; and in 2005, the speeding up of the release of the minutes of FOMC meetings, from a delay of some six or seven weeks to just three weeks.
In testimony to the Congress at the time of my nomination as Chairman, in 2005, I pledged to continue the trend toward greater openness sustained under Chairman Greenspan. In so doing, I stressed the importance of continuity with the policies and strategies that have served the American economy well. Any further changes, I promised, would come only pursuant to a consensus within the FOMC that those changes would enhance the Committee's ability to pursue its dual mandate of achieving maximum employment and price stability.
Toward that end, the FOMC has engaged in extensive deliberations over the past year or so to consider further steps toward greater transparency. Guided by a subcommittee chaired by Board Vice Chairman Donald Kohn, the FOMC reviewed the full range of our communications with the public.2 As indicated in a statement issued by the FOMC today, these discussions have led to a decision to increase the frequency and expand the content of the publicly released economic projections that are made by Federal Reserve Board members and Reserve Bank presidents. As I mentioned, the Federal Reserve has published economic projections for almost thirty years, and, indeed, the Federal Reserve was the first major central bank to release such projections.3 Today's announcement builds on that foundation. In the remainder of my remarks I will describe the changes that we plan to make, and then explain why I believe that, collectively, they represent an important further step toward greater transparency.