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Banking

Fed Chair Bernanke: Communication an Important Policy Tool

Fed Chair BernankeOpen communication and transparency have become essential elements of Federal Reserve policy making, and that approach is unlikely to change, Federal Reserve Chairman Ben Bernanke declared in a November 19 speech in Washington, D.C.

Increased transparency among early goals
Bernanke set out to make the Fed more transparent when he became chairman in 2006. He introduced news conferences after certain Federal Open Market Committee (FOMC) meetings and led efforts to broaden the information the committee releases publicly.

A financial crisis and severe recession did nothing to diminish the importance of communication. The opposite happened, in fact.

"Following the stabilization of the financial system, supporting our economy's recovery from the deepest recession since the Great Depression has required a more prominent role for communication and transparency in monetary policy than ever before," Bernanke said at the National Economists Club's Herbert Stein Memorial Lecture.

Forward guidance became key
Bernanke noted that like many other central banks, the Fed has done much to clarify its goals and its policy approach. It has likewise done more to release regular information about the probable future course of policy.

"This increased transparency about the framework of policy has aided the public in forming policy expectations, reduced uncertainty, and made policy more effective," he said.

Take the FOMC's strategy surrounding the federal funds rate. After the FOMC set the rate at effectively zero—zero to 0.25 percent—in December 2008, the rate could go no lower. However, the chairman pointed out, more monetary policy accommodation was needed, perhaps for a long time.

"Fortunately, the degree of accommodation provided by monetary policy depends not just on the current value of the policy rate, but on public expectations of future settings of that rate," Bernanke remarked. "The Committee accordingly realized that it could ease policy further—and reduce uncertainty about future policy—by assuring the public and markets that it intended to keep the policy rate low for some time, and for a longer period than the public initially expected."

Thus the FOMC issued a series of statements indicating, with increasing specificity, just how long it expected to maintain such an accommodative policy. The FOMC took a similar communications tack after the Fed began its large-scale asset purchase program in 2008.

Transparency has aided the Fed's efforts to bolster economic conditions. "The FOMC," Bernanke said, "remains committed to maintaining highly accommodative policies for as long as they are needed. Communication about policy is likely to remain a central element of the Federal Reserve's efforts to achieve its policy goals."

November 25, 2013

 

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