ithout clear objectives, the task of getting the markets and the Fed in synch is enormously difficult, especially since so many different considerations have to be folded into policy decisions. For example, at any given time, there might be six important considerations that point toward policy easing and four that point toward policy tightening. The FOMC must weigh competing considerations, account for data inaccuracies and determine whether markets have already responded to the flow of information, making a Fed response unnecessary.

That said, the markets and the Fed have made great progress in recent years toward synchronicity. Market participants increasingly possess a deep understanding of monetary policy. In fact, much of the time, the Fed and the markets are in close agreement about what policy actions are required to keep the economy on a steady course. Fed policy-makers and market participants also use similar theories and data to form their short-term expectations. So, incoming information about the economy that surprises markets will typically surprise the FOMC, as well.

The track record of FOMC actions also helps put the markets on the same page with the Fed. So, too, does the FOMC's release of information. Since February 1994, the FOMC has announced changes in the fed funds target the same day that the decisions were made. Six or seven weeks later--a few days after the next scheduled meeting--the FOMC then releases the minutes of the previous meeting. These minutes reveal the topics discussed, summarize views about the state of the economy and describe the reasons for dissenting votes. The minutes are thorough, which provides an important vehicle for keeping the markets and the public well-informed about Fed thinking.

Through congressional testimony, speeches, articles in Fed publications and other ways, Fed officials make every effort to keep the public informed. Although it is commonplace to joke about Fed vagueness, the information flow is, in fact, substantial. Much of this vagueness is inherent in the difficulties of dealing with imperfect information. The accuracy of Fed economic forecasts, for example, is limited by the same lack of knowledge in the discipline of economics that affects everyone else's forecasts.

In the Fed, and certainly in this Reserve Bank, interest in disclosure issues is high. While these issues are not simple, Fed officials are thinking actively about disclosure issues and are fully aware of their importance in helping to bring about greater synchronization with the markets.

What would we expect to see if disclosure and market understanding were so complete that the Federal Reserve and the markets were synchronized? The price level would be stable, and the unemployment rate and real GDP growth rate would be relatively stable. We would certainly not expect, however, the federal funds rate to remain forever constant at an unchanged level. The fed funds rate would have to be higher sometimes and lower sometimes to be consistent with the policy objectives. How would the Fed decide when and by how much to change the federal funds rate target? Federal Reserve staff and FOMC members are continually examining the flow of incoming information on the state of the economy and working to decide which policy actions may be necessary to keep the economy on the desired track. After processing the information, the FOMC would take the appropriate policy action at its next meeting. The market, sharing the Fed's analysis, would not be surprised by the policy decision, whatever it might be.

WHEN IT'S OK TO BE A FOLLOWER

In recent history, it often seems that the Fed is merely ratifying market expectations. Some observers cite this "following" behavior as evidence that the Fed is not exercising proper leadership. On the contrary, the market should be able to predict what the Fed is going to do; the St. Louis Bank believes this synchronicity is what the Fed should be striving for. If monetary policy is to be fully successful, markets must understand the Fed's goals and the procedures used to achieve them. When monetary policy has been successful for an extended period, it should disappear from the headlines. Although the market has gained confidence in the Fed to keep inflation low and steady, we believe more can be done: The Fed should be more explicit about its inflation objective.

Everyone should understand that interest rates will not be perfectly stable if the Fed is successful in achieving its goal of low and stable inflation. Market interest rates have fluctuated substantially in recent years, despite the fact that inflation has changed little. As economic news arrives, the Fed must process the information and make the appropriate adjustments to the federal funds rate target. The better the market understands how and why the Fed reaches its decisions, the better it will be able to respond to new information in the same way the Fed responds to the information. The result will be a smoother, and more efficient, transmission of monetary policy changes to the economy's product, labor and capital markets.

Suppose markets do, in fact, accurately forecast decisions at FOMC meetings. Is that an indication that the Fed is simply following markets and not exercising its proper leadership role? Obviously, this is not the case. Market success in anticipating FOMC actions indicates Fed success both in designing policies that achieve socially acceptable goals and in communicating those goals to the public. The ideal environment is one in which the Fed and the markets are perfectly synchronized.

We at the St. Louis Fed are convinced that continued progress in achieving greater synchronicity will make a major contribution to ending the scourges of inflation and inflation uncertainty, of unstable booms and damaging busts.