indeed, the three recent rate hikes by the fomc were so well anticipated that financial markets hardly responded when those actions were announced. second, in the long run, communicating the central bank ’ s objectives and policy strategies can help to anchor the public ’ s long - term expectations - most importantly, its expectations of inflation. public confidence that inflation will remain low in the long run has numerous benefits. notably, if people feel sure that inflation will remain well controlled, they will be more restrained in their wage - setting and pricing behavior, which ( in something of a virtuous circle ) makes it easier for the federal reserve to confirm their expectations by keeping inflation low. at the same time, by reducing the risk that inflation will come loose from its moorings, well - anchored inflation expectations may afford the central bank more short - term flexibility to respond to economic disturbances that affect output and employment. the third way in which clear and open communication enhances the effectiveness of monetary policy the channel that will be the focus of my remarks today - is by helping to align financial - market participants ’ expectations about the future course of monetary policy more closely with the policy committee ’ s own plans and projections. as i will discuss, to the extent that central bank talk provides useful guidance to markets about the likely future path of short - term interest rates, policymakers will exert greater influence over the longer - term interest rates that most matter for spending decisions. at the same time, expanding the information available to financial - market participants improves the efficiency and accuracy of asset pricing. both of these factors enhance the effectiveness and precision of monetary policy. in the remainder of my remarks i will elaborate on the usefulness of central bank communication as a means of informing the policy expectations of financial - market participants and the public more generally. in doing so, i will discuss some new empirical evidence on the effects of central bank communication policies in both the united states and japan, drawn from a recent paper i prepared with two federal reserve colleagues. before proceeding, however, i should say that the views i express today are not necessarily those of my colleagues on the federal open market committee or in the federal reserve system more generally. communication and the effectiveness of monetary policy although people often speak of the federal reserve as controlling interest rates, in fact the fed directly affects only one very short - term and ( in the scheme of things ) relatively unimportant interest rate, the federal funds rate. as you may know, the federal funds rate is

term policy tightening, presumably on the expectation that the sharp pickup in growth in the third quarter of 2003 would induce the fomc to raise rates. however, this market reaction placed insufficient weight, i believe, on the fact that the expansion that began in mid - 2003 was characterized by exceptional gains in labor productivity, which implied in turn that the rapid growth in output did not materially increase the pressure on resources. with inflation low and with continuing slack in resource utilization, the rapid tightening projected by the markets did not appear justified, the surge in output growth notwithstanding. the language of the statement in august 2003 and subsequent meetings persuaded the markets that an autumn tightening was not in the cards, and market expectations adjusted accordingly. crucially, this change in expectations resulted in lower interest rates at all maturities, a development that helped support the expansion in the latter part of last year. when the policy tightening cycle finally began earlier this year, the fomc indicated that, with underlying inflation still relatively low, it would proceed “ at a pace that is likely to be measured. ” as i discussed in a speech in may, the gradualist approach implied by this statement is often appropriate during a period of economic and financial uncertainty ( bernanke, 2004 ). at the same time that it provided information on its outlook and its expected policy path, however, the committee properly insisted that its policies would be conditional on the arriving economic data. in particular, the committee noted that it would respond as necessary to maintain price stability. before 1994 the public did receive relatively immediate notice of monetary policy action if a change in the fomc ’ s target for the federal funds rate was accompanied by a change in the discount rate, which was always announced in a press release. to be absolutely clear, in pointing out the benefits of clear communication i am not asserting that central bank talk represents an independent tool of policy. indeed, if the central bank ’ s statements are not informative about the likely future course of the short - term interest rate, they will soon lose their ability to influence market expectations. rather, the value of more - open communication is that it clarifies the central bank ’ s views and intentions, thereby increasing the likelihood that financial - market participants ’ rate expectations will be similar to those of the policymakers themselves - or, if views differ, ensuring at least that the difference can not be attributed to the policymakers ’ failure to communicate their outlook, objectives, and strategy to the public and the markets