By Steven K. Beckner

STONE MOUNTAIN, Ga. (MNI) – 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.”

** MNI **

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