frederic s mishkin : whither federal reserve communications speech by mr frederic s mishkin, member of the board of governors of the us federal reserve system, at the peterson institute for international economics, washington, dc, 28 july 2008. the original speech, with a full list of references, can be found on the us federal reserve system ’ s website ( www. federalreserve. gov ). * * * over the years, the federal reserve has significantly increased the transparency of monetary policy making. for example, starting in 1979, the federal open market committee ( fomc ) has included economic projections of the fomc participants in each semiannual monetary report to congress since 1994, the fomc has publicly announced changes in its target for its policy instrument, the federal funds rate. most recently, the fomc extended the horizon for its projections in october 2007 and is now publishing these projections four times a year. 1 has the federal reserve gone far enough? or would further advances in transparency be useful? i will argue here that the science of monetary policy suggests that the federal reserve can indeed go further in enhancing its communication strategy, and that doing so would produce important benefits in economic performance and democratic accountability. i will also outline a specific proposal of my own and address a few concerns that some might have with elements of this proposal. before proceeding, i would like to emphasize that my remarks today reflect only my own views and not necessarily those of anyone else on the board of governors or the fomc. indeed, this disclaimer has even more meaning now since, as many of you know, i will be leaving the federal reserve board at the end of august and returning to columbia university. 2 what are the key scientific principles for monetary policy communication? to think about what kind of central bank communication is desirable, let's begin by considering some key scientific principles regarding the objectives of monetary policy and the benefits of central bank transparency. objectives of monetary policy the modern science of monetary policy is based on the idea that the central bank's objective is to maximize the economic well - being of the households in the economy ( mishkin 2007d ). broadly speaking, this objective can be expressed in terms of two components : minimizing the deviations of inflation from its optimal rate and minimizing the deviations of real economic activity from its so - called natural rate, which is the efficient level determined by the productive potential of the economy. moreover,

new issuance of asset - backed securities ( abs ), which provided funding for auto loans, credit cards, student loans, and other loans to consumers and small businesses, had virtually ceased. investors had lost faith in the quality of the triple - a ratings on the securities, and the complex system that funded the securities see congressional budget office, “ the budgetary impact and subsidy costs of the federal reserve ’ s actions during the financial crisis ( 7. 79 mb pdf ) ”, may 2010. known as the “ shadow banking system ” broke down. without access to funding, credit for households and small businesses would have become even less available and more costly. the federal reserve designed the term asset - backed securities loan facility, or talf, to provide funds for the purchase of securities backed by new consumer loans. in the end, nearly 3 million auto loans, over 1 million student loans, about 850, 000 small business loans, and millions of credit card accounts were supported by talf - eligible securities. talf worked. it served its intended purpose of unlocking lending, the lifeblood of the u. s. economy. as pleased as i was to see that talf worked, i was even more pleased when it eventually became unnecessary. abs issuance remained stable in the months after talf ended. while liquidity helped restore the market for consumer loan securitization, liquidity alone did not solve all the consumer credit problems exposed by the crisis. additional consumer protection would also be needed to restore healthy consumer lending. enhancing consumer protection the first signs of serious consumer credit distress appeared in the subprime mortgage market, and much attention has been deservedly paid to correcting problems in that market. in hindsight, though, we also see that the developments in the u. s. mortgage market, fueled by the credit boom, revealed acute weaknesses in mortgage finance that eventually had farreaching effects on many other forms of credit. the gradual but widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, and increased reliance on complex and opaque credit instruments led to the current set of circumstances in which lenders are skittish about lending, borrowers are skittish about borrowing, and investors are skittish about investing. the credit markets must reemerge in sounder and more transparent ways in order for “ normal ” lending activity – whatever that will mean in the coming months and years – to reemerge. essential to jumpstarting market