For release: Oct. 6, 2004

Contacts:	Joe Elstner
	Office:	(314) 444-8902
	E-mail:	joseph.c.elstner@stls.frb.org
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	Charles Henderson
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	E-mail:	charles.b.henderson@stls.frb.org
	Mobile:	(314) 609-5972
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St. Louis Fed's Poole: FOMC Transparency Sounds Easy, But Isn't

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Springfield, MO.— "It's hardly surprising that central bankers are more talkative today than they were just a decade or so ago, and more concerned about improving transparency and communication with the market.  But perhaps only one issue is settled: Transparency is important, but is hard to accomplish because miscommunication is so easy.  Clearly, more talk does not necessarily mean greater transparency."

That was the central point made today by William Poole, president of the Federal Reserve Bank of St. Louis, in remarks to the Ozark Chapter of the Society of Financial Service Professionals.

A number of central banks, Poole noted, have moved toward more transparency by regularly announcing inflation objectives.  Included are the central banks of New Zealand, Canada, Australia, England, Albania, Brazil, Chile, Columbia, the Czech Republic, Georgia, Hungary, Iceland, Israel, Mexico, Norway, Peru, the Philippines, Poland, Serbia, Sierra Leone, South Africa, South Korea, Sri Lanka, Sweden, Switzerland, Tanzania, Thailand and Turkey.

The Federal Reserve is not part of that group, said Poole, but its practice of transparency has evolved over time.  In contrast to the inflation targeting central banks, the Federal Open Market Committee (FOMC) has never associated a value or range of values with price stability.  The FOMC, he said, has interpreted as its objective the responsibility to achieve price stability in order to promote maximum sustainable economic growth.

"The transparency of the FOMC on policy actions has improved considerably over the past 10 years," Poole said.  Beginning in February 1994, the FOMC issued a press release at the end of every meeting at which a policy action was initiated.

Beginning with the May 1999 meeting, the FOMC issued a press release at the end of each meeting at which there were major shifts in its views about upcoming developments.  These statements included an indication of policy "bias" which was widely interpreted in the press and financial markets as hinting at future policy actions.

After the January 2000 FOMC meeting, the policy bias in the press release was dropped in favor of a "balance of risks" statement about the attainability of both sustainable growth and price stability over the next few quarters.  In May 2003, the Committee added an additional sentence to the press release:  "In these circumstances, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured."  Most recently, the FOMC in June 2004 conditioned its "measured pace" statement with the additional sentence that "the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."  Poole noted that to date, the Committee's actions have been consistent with the public interpretations of those statements.

"Given that policy actions have a transient effect on the real economy but only a lasting effect on prices," said Poole, "and given that the effects on the real economy are uncertain in magnitude and duration, it's important that the Fed be transparent about both its short-run objective for the real economy and its long-run inflation objective.  Transparency should help markets make the best possible adjustments over time and minimize uncertainty flowing from monetary policy itself."

Poole stressed that "forward-looking Fed policy statements should always be interpreted as conditional on future events.  A forward-looking statement is not an ironclad commitment, but rather a statement of belief based on what we know now.  It's unfortunate whenever such a statement is read as a commitment.  If new information suggests that the previous setting is no longer consistent with achieving policy objectives, the FOMC can adjust the setting."

Poole said, " believe it is important to provide as much information as possible about the rationale for policy actions.  It might be useful to provide information about likely future policy on a routine basis, but the difficulties of doing so should not be underestimated."

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