Bernanke: ‘Significant Progress’ on Openness

WASHINGTON, DC - MARCH 22: Federal Reserve Board Chairman Ben Bernanke lectures at George Washington University March 22, 2012 in Washington, DC. Bernanke is taking part in a series of four classes at the university on the role of the Federal Reserve in central banking. (Photo by Win McNamee/Getty Images)
National Journal
Catherine Hollander
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Catherine Hollander
Nov. 19, 2013, 4:12 p.m.

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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