see janet l. yellen ( 2012 ), “ revolution and evolution in central bank communications, ” speech delivered at the haas school of business, university of california, berkeley, november 13. bis central bankers ’ speeches it is hard to imagine now, but only two decades ago, the federal reserve and other central banks provided the public with very little information about such monetary policy moves – the spirit of “ never explain ” was very much alive. there were a number of different justifications for this approach. one view was that less disclosure would reduce the risk and tamp down suspicions that some could take advantage of disclosures more readily than others. some believed that markets would overreact to details about monetary policy decisions. and there was a widespread belief that communicating about how the fomc might act in the future could limit the committee ’ s discretion to change policy in response to future developments. in sum, the conventional wisdom among central bankers was that transparency was of little benefit for monetary policy and, in some cases, could cause problems that would make policy less effective. while communication and transparency steadily increased elsewhere in government and society, change came slowly to the fomc. it wasn ’ t until february 1994 that the committee issued a postmeeting statement disclosing a change in monetary policy. even then, it only alerted the public that the committee had changed its policy stance, with scant explanation. 4 something big was changing, however, and it would soon be the force driving major enhancements in the fomc ’ s communication. by the early 1990s, a growing body of research challenged widespread assumptions about the how central banks, such as the federal reserve, affected the economy. the reevaluation starts with a question that puzzled many of my students when i was a professor : how is it that the federal reserve manages to move a vast economy just by raising or lowering the interest rate on overnight loans by 1 / 4 of a percentage point? the question arises because significant spending decisions – expanding a business, buying a house, or choosing how much to spend on consumer goods over the year – depend on expectations of income, employment, and other economic conditions over the longer term, as well as longer - term interest rates. the crucial insight of that research was that what happens to the federal funds rate today or over the six weeks until the next fomc meeting is relatively unimportant. what is important is the public ’ s expectation of how the fomc will use

rates – which softened the blow of higher fuel costs on households and businesses – because of the credibility the federal reserve had built since the 1980s. if the public ’ s expectations have always been important, you might wonder how monetary policy had any effect prior to the transparency revolution. as it turns out, with the notable exception of the late 1960s and 1970s, the fomc usually responded in a systematic way to economic conditions. in 1993, economist john taylor documented that fomc policy changes since the mid - 1980s had fairly reliably followed a simple rule based on inflation and output. changes in the federal funds rate were usually made in several small steps over a number of months. in practice, the federal reserve ’ s approach was “ never explain, but behave predictably. ” a close analysis of the fomc ’ s past behavior was a good guide to future policy, but it had two shortcomings as a substitute for transparency : first, it gave an advantage to sophisticated players who studied the fomc ’ s behavior – something that is arguably inappropriate for a government institution. second, while a policy rule such as the one developed by john taylor explained the course of the federal funds rate much of the time, there were cases when it didn ’ t and when even the experts failed to correctly anticipate the fomc ’ s actions. the trend toward greater transparency accelerated during the early 2000s. starting in 2000, the fomc issued information after every meeting about its economic outlook. it also provided an assessment of the balance of risks to the economy and whether it was leaning toward increasing or decreasing the federal funds rate in the future. such information about intentions and expectations for the future, known as forward guidance, became crucial in 2003, when the committee was faced with a stubbornly weak recovery from the 2001 recession. it had cut the federal funds rate to the very low level of 1 percent, but unemployment remained elevated, and the fomc sought some further way to stimulate the economy. in this situation, it told the public that it intended to keep the federal funds rate low for longer than might have been expected by adding to its statement that “ [ i ] n these circumstances, the committee believes that policy accommodation can be maintained for a considerable period. ” 6 let ’ s pause here and note what this moment represented. for the first time, the committee was using communication – mere words – as its primary monetary policy tool. until then, it was probably common to think of