he theme of this year's annual report suggests an ambitious goal: to better synchronize the Federal Reserve and the financial markets. Just as trapeze artists display a mastery of timing and communication to achieve an outstanding acrobatic feat, the Fed and financial markets could use similar skills to achieve an outstanding economic feat. What would such a feat require? Ideally, that the Fed and the financial markets receive the same information at the same time and interpret it the same way. The first part is easy. For all practical purposes, the markets and the Fed do receive the same data at the same time. Developing a common interpretation, though, is not so easy.

The impact of such a synchronization would be significant. The print, broadcast and electronic media speculation that occurs before each meeting of the Federal Open Market Committee (FOMC) would become less intense. The media would concentrate on interpreting the data, rather than on interpreting the Fed.

The decreased news coverage would, however, be the least important consequence of a synchronized financial system. Most important would be the impact that closer synchronization would have on businesses and households. The markets and the Fed would both concentrate on the difficult task of understanding the flow of information, with all its inherent uncertainties and ambiguities. Because of the difficulty of this task, the Fed's and the markets' interpretations would not always be correct, but they would be close to one another. Businesses and households, therefore, would not make mistakes because of their misunderstanding of the Fed's intentions and interpretations.

In this report, we'll first take stock of the inefficiencies that arise in the present day when the Fed and the markets are operating on different wavelengths. We'll then consider what we at the St. Louis Fed believe can be done to bring about greater synchronicity with financial markets. Finally, we'll look at some of the steps that are already under way to improve synchronicity.