The speech isn't that long. As they say, read the whole thing. This part seems particularly relevent to some issues the blogosphere has been buzzing about this year.
Starting with the policy statement following its meeting on August 12, 2003, the FOMC began to provide firm guidance as to the future direction of policy. The statement said that the Committee “…believes that policy accommodation can be maintained for a considerable period.” This language was repeated until the statement released on January 28, 2004, when the Committee said that it “… believes that it can be patient in removing its policy accommodation.” That language was continued until May 4, 2004 when the Committee said that it “believes that policy accommodation can be removed at a pace that is likely to be measured.” At its meeting of June 29-30, 2004 the Committee raised the target federal funds rate by 25 basis points and issued a statement repeating the “measured pace” language. That language came to be interpreted in the market as creating an expectation of an increase in the target fed funds rate of 25 basis points at the next FOMC meeting and, depending on circumstances, at the next several meetings. At every subsequent meeting following the June 2004 meeting, through its most recent on June 29-30, 2005, the Committee raised the target funds rate by 25 basis points and repeated the “measured pace” language.
Providing guidance on likely future policy actions is a significant departure for the Federal Reserve. Historically, the Fed and other central banks have been reluctant to provide forward guidance out of a concern that doing so would limit freedom of action in the event of new information indicating that changed circumstances called for a change in policy direction. If the markets have a thorough understanding of policy, including an understanding that forward guidance is conditional on the information available to the central bank at the time the guidance is issued, then markets should not have difficulty in understanding how new information might require policy action that differs from the guidance.
Experience to date with forward guidance has been successful but in my opinion it is too early to tell whether this departure will be successful in the long run. The matter will be tested when changed circumstances require policy action that differs from forward guidance.
I believe that improved predictability of policy has had much to do with improved effectiveness of policy. Poole and Rasche (2000) argue that changes in policy practice have moved the economy toward a rational expectations macroeconomic equilibrium in which the Fed and the markets react in similar fashion to the arrival of new information. Synchronized responses between the markets and the Fed enhance the economy’s adjustment to changed circumstances, thereby increasing economic stability and efficiency. In the years ahead, maintaining and extending improved predictability of policy will be a major challenge for Federal Reserve chairmen.
Can't say I disagree.
King at SCSU Scholars has more on the panel at the WEAI meetings (where this speech was delivered).
Mark Thoma links to a Reuters story about the event.
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