A Look at Key Tenets of the Poole Presidency

Edward Nelson, Faith Weller

On March 31, 2008, William Poole retired as president of the Federal Reserve Bank of St. Louis after 10 years of service. Throughout his time as president and as a participant in Federal Open Market Committee (FOMC) meetings, Poole consistently advocated an approach to monetary policy that emphasized communication and predictability.

As Poole observed, "Since coming to the St. Louis Fed in 1998, I have spoken often on the subject of the predictability of Federal Reserve policy, emphasizing that predictability enhances the effectiveness of policy. Predictability has many dimensions, but one is certainly that the market cannot predict what the Fed is going to do without a deep understanding of what the Fed is trying to do."[1] Therefore, to achieve predictability a policy agency must state its policy objectives clearly to the public.

In addition to public transparency, Poole helped focus the Fed on meeting its legislated goals, including the Employment Act of 1946, which gives the federal government responsibility for promoting "maximum employment, production and purchasing power." As an element of the federal government, the Federal Reserve is therefore assigned the objectives of both high employment and price stability.

Poole, however, suggested that the best way that the Federal Reserve could meet this legislated role in practice was to focus on a single, central policy goal. He believed that the Fed's focus should be on achieving price stability; if this was accomplished, "then we will have done our job and done it well."[2] Price stability supports a healthy economy as it "appears to be helpful in holding down the average level of unemployment" and is "conducive to maximum growth and efficient utilization of the resources available to a society."[3] In this way, the Fed is able to contribute to economic welfare and the goals stated in the Employment Act.

An important reason why the achievement of price stability contributes to achievement of the economic goals, according to Poole, is that it eliminates a source of uncertainty for consumers and firms when they are making long-term decisions. Banking decisions are helped, too, for, as Poole said in 2007, "Long-run price stability contributes to financial stability.... An unstable price level can lead to bad forecasts of real returns to investment projects and, hence, to unprofitable borrowing and lending decisions."[4]

Poole concluded that the pursuit of price stability would be aided by the Federal Reserve's announcement of an explicit target for the U.S. inflation rate. Poole believed that "adding formality to that objective can clarify what the Fed does and why."[5]

In 2007, the FOMC adopted a new transparency and communication policy. As a part of this policy, the FOMC's economic projections are now released more frequently and in greater detail. There is, consequently, less uncertainty for financial markets and the general public. The new policy is consistent with the communication strategy and the price stability objective that Poole advocated.

Endnotes

  1. William Poole, "Inflation Targeting," speech before Junior Achievement of Arkansas Inc., Little Rock, Ark., Feb. 16, 2006. [back to text]
  2. William Poole, "A Policymaker Confronts Uncertainty," speech before The St. Louis Gateway Chapter National Association for Business Economics, St. Louis, Mo., Sept. 16, 1998. [back to text]
  3. Ibid. [back to text]
  4. William Poole, "Inflation, Financial Stability and Economic Growth," speech before Global Interdependence Center Abroad, Santiago, Chile, March 5, 2007. [back to text]
  5. William Poole, "Inflation Targeting," speech before Junior Achievement of Arkansas Inc., Little Rock, Ark., Feb. 16, 2006. [back to text]

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