One of Ben Bernanke’s goals when he became chairman of the Federal Reserve was to make the historically secretive central bank more transparent. The hope was that the economy would reap the benefits.
On Tuesday night, just 10 weeks from the end of his eight-year term as Fed chairman and with the economy still far from its pre-financial-crisis strength, he explained and defended those efforts.
“The Federal Reserve, like many central banks around the world, has made significant progress in recent years in clarifying its goals and policy approach, and in providing regular information about the future path of policy that it views as most likely to attain its objectives,” Bernanke said in remarks prepared for a speech at the National Economists Club’s annual dinner in Washington.
“This increased transparency about the framework of policy has aided the public in forming policy expectations, reduced uncertainty, and made policy more effective,” Bernanke said.
The former Princeton University professor made communications a signature issue during his term as head of the Fed. In late 2007, not quite two years into his chairmanship, he gave a speech on the same topic in which he declared “good communications” to be a prerequisite for sound monetary policymaking, and transparency a boon to the effectiveness of those policies.
According to Bernanke, that’s because people with greater certainty about the economy will make better-informed financial decisions; financial markets with greater understanding of how policy and data intersect are more likely to drive asset prices and bond yields in ways that help the central bank achieve its goals; and providing some clarity could help anchor the public’s inflation expectations over the long run.
The Bernanke Fed took a number of steps in an effort to achieve those ends. In 2011, for example, the central bank launched regular quarterly press conferences with the chairman. It adopted an explicit inflation target of 2 percent in 2012, and began explicitly tying its guidance for when it would raise its benchmark interest rate to economic conditions.
The move toward greater openness faced criticism this fall when the Fed surprised markets by not beginning to taper its monthly $85 billion bond-buying program. Some Fed-watchers questioned whether the central bank’s newfound chattiness was causing confusion and sending mixed signals.
Bernanke defended the Fed’s decision to keep its bond-buying program steady, despite expectations, on Tuesday. “Although the [Fed’s] decision came as a surprise to some market participants, it appears to have strengthened the credibility of [the Fed’s monetary policy-setting committee’s] forward rate guidance,” Bernanke said.
Janet Yellen, the Fed’s vice chair and President Obama’s choice to replace Bernanke when his term expires in January, has pledged to maintain the focus on communications as a monetary-policy tool. “To diminish unnecessary volatility, I think we have to redouble our efforts to communicate as clearly as we possibly can,” she told members of the Senate Banking Committee at her nomination hearing last week.
Neither Bernanke nor Yellen supports legislation proposed by Sen. Rand Paul, R-Ky., that would allow the Fed’s monetary policy decisions to be audited. Right now, the central bank’s books are subject to a regular audit, but the details of its policy-setting decisions are more closely held. Fed officials have said they worry such probing would put a damper on their discussions.
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