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Federal Reserve Transparency More Than Just Opening Up, Says St. Louis Fed's Poole


ST. LOUIS — Federal Reserve communications issues are often discussed under the term "transparency," said William Poole, president of the Federal Reserve Bank of St. Louis. "What, literally, does 'transparency' mean? The idea is that we could throw open the curtains and allow the public to look in through clear windows. But I think the word 'transparency' is misleading in describing Federal Reserve communications challenges. Instead, the Fed needs a conscious communications strategy rather than a strategy of simply 'opening up.' The purpose of a conscious strategy is not to hide anything but rather to have a clear transmission of information."

Poole's comments were made in a speech to the St. Louis Forum, an association of women executives.

"Any strategy requires a clear idea of goals," Poole said. "For Fed communications strategies there are a number of possible goals, but I'll emphasize two. First, the Federal Reserve, as a creature of Congress, clearly has to be politically accountable. We need to be responsive to questions from Congress and the public at large. The Fed needs to be as clear as possible as to the goals of monetary policy and the standards used in judging our success in meeting those goals."

Poole said that a second goal of Fed communications strategy is to make monetary policy more effective. "This is a goal of great importance in achieving the congressional mandate provided to the Federal Reserve," he said. "From the Fed's viewpoint, policy effectiveness will be enhanced when the market has a complete and accurate understanding of the Fed's goals and policy processes."

In singling out Federal Reserve communication challenges, Poole cited the policy statements released after each meeting of the Federal Open Market Committee (FOMC) and the policy statements in FOMC members' speeches and testimonies. "This public information isn't always perfectly clear," Poole said. "Not only are there uncertainties in the economy and uncertainties faced by FOMC members, it's also natural for committee members to have somewhat different views and for those views to evolve over time. For these reasons, the summary policy statement after each FOMC meeting and the FOMC minutes of meetings play a critically important role."

Poole said his own view on the policy statement is that it needs to be compiled of a few standard elements. "There is a natural tendency to try to write in an interesting and literate fashion," he said. "One way to do so is to use synonyms to avoid repetition. That can be tricky, however. Suppose one policy statement describes the outlook as 'solid' and the next as 'robust.' Is robust a shade higher growth than solid? How much higher? Examples of this sort abound. What is the difference between 'moderate' and 'modest' growth? For these reasons and others, I believe that clarity in FOMC statements could be improved by making them more stylized. A stylized statement might be dull, but the market will search for meaning whenever the statement changes. If we want changes to have clear meaning, we need to form statements from stock phrases that have been explained before."

To further boost communications clarity, Poole suggested that the FOMC adopt an explicit policy of making all policy adjustments only at scheduled meetings unless there were a compelling circumstance to act between meetings. He also recommended an explicit understanding that all policy adjustments will be in increments of 25 basis points unless compelling reasons argue for larger moves.

"Over the past decade, the market has been able to predict FOMC policy adjustments with considerable accuracy," said Poole. "That indicates that policy has been systematic enough, and communications effective enough, that we've made major progress toward achieving the goal of a full rational expectations macroeconomic equilibrium. Relative to that progress, my suggestions are minor refinements, but there is every reason to pursue further gains."

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