Bloomberg News

Fed Began Opening Up Aiming to Make Policy More Effective

January 24, 2012

(Updates with Kohn comments in ninth paragraph.)

Jan. 12 (Bloomberg) -- Federal Reserve officials in 2006 began their current opening up to greater scrutiny with warnings that their goal was to make policy more effective rather than make the Fed transparent to the public.

“We need to keep in mind that communication is not an end in and of itself,” then-vice chairman Donald Kohn said in an August 2006 Fed meeting, according to transcripts released today. “It’s a means to an end. Where we rank on some professor’s table of transparency isn’t really what it’s about.”

The Federal Open Market Committee in 2006 debated providing more forecasts, adopting an explicit target for the inflation rate and releasing officials’ expectations for the path of interest rates, a step to be taken for the first time on Jan. 25. Released with a five year lag, meeting transcripts open a window into the opinions of the central bank’s inner circle, including Chairman Ben S. Bernanke and Vice Chairman Janet Yellen.

“We should not put in our list of goals that our objective is to maximize transparency for the sake of greater transparency,” said Yellen, then president of the San Francisco Fed.

“The research in this area provides very ambiguous advice about how much transparency is optimal,” said Yellen, who is currently chairing the Fed’s subcommittee on communications.

The meetings show Bernanke -- who replaced Alan Greenspan as leader of the central bank in the March 2006 meeting -- expressing concern about whether he was perceived as too vigilant on inflation early in his tenure.

‘Too Aggressive’

“I am concerned about the effect on the markets of perceiving the Fed as too aggressive,” Bernanke said. “There is a new Chairman. They don’t know me. As far as they know, I am an inflation nutter, and I want to make sure that they understand that output is one of our concerns.”

The transcripts show current members of the Fed uncertain about the appropriate level of transparency, with Dallas Fed President Richard Fisher saying, “there are some who would like to provide what I call a full frontal view of what we look like and what we discussed. But as I like to say, Mr. Chairman, in romancing the market sometimes a little modesty might be more effective in achieving the ultimate goal.”

Kohn said today in an e-mail, “I still think transparency is a means to an end.”

‘Fuller Understanding’

“That end is fuller understanding of the objectives, strategies and expectations of the Federal Reserve so as to enhance the ability of the private sector to make informed decisions, which should enhance the effectiveness of monetary policy and enhance the ability of the electorate and their elected representatives to oversee the conduct of policy,” he said.

“However, some types of transparency can have the potential to reduce the effectiveness of policy and make policy making more difficult,” Kohn said.

The transcripts also reveal how the views of Fed officials evolve over time. In the August 2006 discussion Bernanke said, “in general we don’t want to provide the future funds rate path. I see a lot of problems with that.”

After its Jan. 24-25 meeting, the Fed will do exactly that by publishing its own forecasts for policy.

The FOMC has taken gradual strides toward expanding its communications under Bernanke’s tenure. The committee now publishes policy makers’ forecasts four times a year, up from two during the Greenspan era. Last year the central bank announced that Bernanke would hold four press conferences a year, scheduled to follow the central bank’s two-day meetings.

New Data

In November the committee released new data that reveals its changing views about risk and uncertainty. In December, the Federal Reserve Bank of New York made public a survey on monetary policy, financial markets and the economy conducted with the 21 government-bond firms that trade directly with the central bank.

St. Louis Fed President James Bullard said in an interview with Bloomberg Radio earlier this month that the central bank is also “very close to having inflation targeting in the U.S.”

Adopting an inflation target was the subject of a lengthy discussion at the end of the Fed’s Oct. 24-25, 2006 meeting. Fed officials discussed the need to find consensus around a particular inflation index and a particular numerical goal, and also debated whether the move would unnecessarily restrict the FOMC’s flexibility.

‘Significant’ Benefit

“Remember, this debate is about communication,” Bernanke said. “I think it’s very important that we communicate better. While our policy has been good, we have had difficulties -- I certainly have -- in communicating with the public and the markets. If we can find a more effective, clearer way to do that, I think the benefit would be significant.”

Richmond Fed President Jeffrey Lacker argued that the central bank owed the public a clear statement of its inflation goals.

“Whenever I encounter one of those software programs for calculating your retirement income and they ask for a lot of assumptions -- such as your age, your salary, your age at retirement, and how fast your wages will go up, and all -- and they get to a box where they ask what the inflation rate is going to be, I think to myself, I don’t know what to put in there,” Lacker said.

“It’s a real tragedy that we don’t have anything to tell the country for circumstances like that,” he said.

Further discussion of inflation targeting was deferred to 2007 and the committee ultimately decided not to adopt such a target that year. The transcripts from the 2007 meetings will be released in 2013.

--Editors: James Tyson, Gail DeGeorge

To contact the reporter on this story: Joshua Zumbrun in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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