STONE MOUNTAIN, Ga. - The Federal Reserve's increased transparency is "genuine, positive" and "irreversible," and there is even more the nation's central bank can do to improve communication, San Francisco Federal Reserve Bank President John Williams writes in the Bank's annual report released Tuesday.
Williams writes that the Fed has gone from being "behind the curve" to being among the leaders in transparency among major central banks.
He says that the policymaking Federal Open Market Committee's new practice, announced in January, of setting an inflation target and announcing interest rate forecasts should improve public understanding of monetary policy and increase the effectiveness of policy.
Williams acknowledges that "the Fed's move out of the shadows has been at times slow and hasn't always been voluntary." The Fed was forced to become more transparent by Congress and the media.
"Nor has it always been comfortable, for example, to see our internal deliberations and disagreements laid bare," he adds.
"But the fact is that this greater openness is genuine, it's positive, and it's irreversible," Williams writes.
"Inside the Fed, a consensus has developed on the necessity and value of greater disclosure, accountability, and candor, a view that has taken hold strongly under the leadership of Chairman Bernanke," he writes. "When the public better understands what the Fed is trying to do, uncertainty about its policies is reduced, and households and businesses are able to make spending and investment decisions with greater confidence."
"More fundamentally, in a democratic society, an institution that performs functions as vital as the Federal Reserve must operate in the public eye as much as possible," Williams continues. "What we do at the Fed is not always easy for the public to understand. Clear communication and greater openness are essential to promote understanding, counter misinformation, and earn public trust and support."
Because the Fed has been endowed with independence from fiscal policy, he says "this privilege comes a great responsibility: to operate for the public good, to be accountable to the public, to hold ourselves to the highest ethical standards, and to be open to criticism."
Williams says the changes the Fed has made in its communications have been "far-reaching" and says they "amount to a cultural regime change."
But there is more to be done, he suggests.
"I believe we must strive to find ways to further earn the trust and understanding of the American people," he writes. "For example, we can do a better job of explaining what our mission is, how we're structured, and why we do what we do."
"That also means making clear what the Fed does not control, such as tax and spending decisions," he writes. "We can also do better at showing how the Federal Reserve affects the everyday lives of people across the country. And, we can make increasing use of new technologies, such as social media, to encourage real dialog between the Fed and people from all walks of life."
In January, the FOMC announced a 2% inflation target and also said that over the long run members believe the normal rate of unemployment falls between 5.2 and 6%. In a "Statement of Longer-Run Goals and Policy Strategy," the Fed said the FOMC would follow "a balanced approach in promoting (its goals), taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate."
The FOMC also began accompanying its quarterly three-year economic forecasts with forecasts of the federal funds rate.
Explaining the purpose of this new approach, Williams writes, "that's a way for policymakers to explain what they think monetary policy should be in the years ahead."
"Releasing the views of FOMC participants this way should help the public understand better our policy plans and the factors that cause us to change them," he says. "This greater clarity about our thinking, in turn, improves the effectiveness of our policies in achieving our mandated goals, and enhances the accountability and transparency of our actions."
Williams writes that "these initiatives represent almost a total turnaround from the days when the public had to guess what the Fed was doing. I am proud to say that we've gone from being behind the curve relative to other central banks to becoming one of the leaders in transparency, accountability, and openness about monetary policy."
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