Alan Greenspan: Transparency in monetary policy
Remarks (via videoconference) by Mr Alan Greenspan, Chairman of the Board of Governors of the US
Federal Reserve System, at the Federal Reserve Bank of St. Louis, Economic Policy Conference, St.
Louis, Missouri, 11 October 2001.
* * *
It is my pleasure to address this distinguished group that President Poole and his colleagues have
assembled to consider the timely issue of transparency in monetary policy. We at the Federal Reserve
are given two mandates that are not often spelled out explicitly. First, to implement an effective
monetary policy to meet our legislated objectives. But, second, to do so in a most open and
transparent manner in recognition that we, as unelected officials, are accountable both to the
Congress from which we derive our monetary policy mission and, beyond, to the American people.
These twin goals do not always work in concert. In the extreme, we could achieve full transparency if
our deliberations and actions occurred only in public fora. In principle, there is no reason this could not
be done. And I do not doubt that there exists a select group of professionals who could deliberate in
such open fora as effectively as behind doors. Milton Friedman--whose effect on monetary policy,
especially here at the Federal Reserve Bank of St. Louis, is legendary--is one with such sharply
refined skills. I might be able to name a few more, but I doubt that I would get much beyond counting
the fingers on one hand.
Human nature being what it is, the vast majority of us are disinclined to offer half-thought-through, but
potentially useful, policy notions only to have them embarrassingly dissected in front of a national
television audience. When undertaken in such a medium, deliberations tend toward the less
provocative and less useful. I do not say that such a system cannot function, but I do say that in my
three decades in and out of government, I have never seen it function well. The undeniable, though
regrettable, fact is that the most effective policymaking is done outside the immediate glare of the
press. But that notion and others have been used too often in the past to justify a level of secrecy that
turned out to be an unnecessary constraint on our obligation to be transparent in conducting the
public's business.
We need to remember that in decades past it was believed that monetary policy was most effective
when it was least transparent. The argument back in the 1950s, as I remember it, was that market
uncertainty created significant differences of opinion in the direction of the prices of short-term debt
instruments. The result was a "thick market" of bids and asks that increased the degree of liquidity.
More recently, in the 1980s, policymakers, myself included, were concerned that being too explicit
about short-run targets would make such targets more difficult to change, impeding necessary
adjustments to evolving market and economic conditions. Not too many years ago, the world learned
of decisions of the Federal Open Market Committee through minor variations in the minutia of daily
open market operations--that is, effectively through faint signals that only informed market
professionals knew how to read with accuracy. True, over time, those signals became increasingly
clear, so that in the end, market participants never missed a policy decision or read into our open
market operations a policy action when there was none.
As markets, experience, and the magnitude of outstanding financial instruments changed, the
deadweight loss created by such uncertainty--read: "risk"--became increasingly evident, as did the value of
transparency. Simply put, financial markets work more efficiently when their participants do not have to
waste effort inferring the stance of monetary policy from diffuse signals generated in the day-to-day
implementation of policy. And being clear about that stance has not constrained our ability to adjust
the stance of monetary policy in either direction.
Our current disclosure policy, one hopes, obviates such complexities. In recent years, we have
achieved a far better balance, in my judgment, between transparency and effective monetary policy
implementation than we thought appropriate in the past. Accordingly, as you know, we moved to the
immediate disclosure of our policy actions and, over time, to explaining our decision and our sense of
future risks directly after each meeting. In addition, we now publish full transcripts of our meetings after
five years. Through these disclosures, together with congressional testimony, speeches by Board
Governors and Reserve Bank Presidents, and the publication of the System's sizable research output,
we endeavor to keep the public well informed. We have gotten to our present degree of transparency
through an incremental process, and our disclosure policy will continue to evolve. At each step, we
need to review whether in our judgment this new degree of openness optimizes the Federal Reserve's
ability to implement effective monetary policy in the context of maximum feasible disclosure.
It is inherent in the complex and changeable nature of our economy that no one can forecast
nearterm outcomes with precision. However, it is also inherent in our economy that in the long run, the
central bank has influence over only nominal magnitudes. As a result, the Federal Reserve can be
quite explicit about its ultimate objectives--price stability and the maximum sustainable growth in
output that is fostered when prices are stable. By price stability, however, I do not refer to a single
number as measured by a particular price index. In fact, it has become increasingly difficult to pin
down the notion of what constitutes a stable general price level.
When industrial product was the centerpiece of the economy during the first two-thirds of the twentieth
century, our overall price indexes served us well. Pricing a pound of electrolytic copper presented few
definitional problems. The price of a ton of cold rolled steel sheet, or a linear yard of cotton
broadwoven fabrics, could be reasonably compared over a period of years. But in our new century, the
simple notion of price has turned decidedly ambiguous. What is the price of a unit of software or a
legal opinion? How does one evaluate change in the price of a cataract operation over a ten-year
period when the nature of the procedure and its impact on the patient has changed so radically?
Indeed, how will we measure inflation, and the associated financial and real implications, in the
twentyfirst century when our data--using current techniques--could become increasingly less adequate for
tracing price trends over time?
So long as individuals make contractual arrangements for future payments valued in dollars however,
there must be a presumption on the part of those involved in the transaction about the future
purchasing power of money. No matter how complex individual products become, there will always be
some general sense of the purchasing power of money both across time and across goods and
services. Hence, we must assume that embodied in all products is some unit of output, and hence of
price, that is recognizable to producers and consumers and upon which they will base their decisions.
Doubtless, we will develop new techniques of price measurement to unearth those units as the years
go on. It is crucial that we do, for inflation can destabilize an economy even if faulty price indexes fail
to reveal it.
For all these conceptual uncertainties and measurement problems, a specific numerical inflation target
would represent an unhelpful and false precision. Rather, price stability is best thought of as an
environment in which inflation is so low and stable over time that it does not materially enter into the
decisions of households and firms. Nonetheless, I cannot help but conclude that the progress that the
Federal Reserve has achieved over the years in moving toward this old definition of price stability has
contributed to the improvement in our nation's longer-term growth prospects that became evident in
the latter part of the 1990s. So, for the time being, our conventional measures of the overall price level
will remain useful.
President Poole has picked an appropriate topic for this group to consider. The historical record
indicates that the increased transparency of the Federal Reserve has helped improve the functioning
of markets and enhanced our credibility. But, to repeat, openness is more than just useful in shaping
better economic performance. Openness is an obligation of a central bank in a free and democratic
society. U.S. elected leaders chose to vest the responsibility for setting monetary policy in an
independent entity, the Federal Reserve. Transparency of our activities is the means by which we
make ourselves accountable to our fellow citizens to aid them in judging whether we are worthy of that
task.