Grossman on Transparency at the Fed

Professor of Economics Richard Grossman writes in OUPBlog, the blog of Oxford University Press, that the financial world’s fervent “Fed watching” used to be a lot more difficult. In contrast to the regular press conferences now held by the Federal Reserve chair to explain recent policy actions, the body governing monetary policy was, for much of its history, quite secretive not only about its future actions, but also its current ones. He writes:

The Fed’s monetary policymaking body, the Federal Open Market Committee (FOMC), was created under the Banking Act of 1935. For the first three decades of its existence, it published brief summaries of its policy actions only in the Fed’s annual report. Thus, policy decisions might not become public for as long as a year after they were made.

But, beginning in the 1960s, the Fed gradually became more transparent about its policymaking, and other central banks followed suit. Grossman thinks this is a good thing:

Despite disagreements over how much transparency is desirable, it is clear that the steps taken by the Fed have been positive ones. Rather than making the public and financial professionals waste time trying to figure out what the central bank plans to do—which, back in the 1980s took a lot of time and effort and often led to incorrect guesses—the Fed just tells us. This make monetary policy more certain and, therefore, more effective.

Greater transparency also reduces uncertainty and the risk of violent market fluctuations based on incorrect expectations of what the Fed will do. Transparency makes Fed policy more credible and, at the same time, pressures the Fed to adhere to its stated policy. And when circumstances force the Fed to deviate from the stated policy or undertake extraordinary measures, as it has done in the wake of the financial crisis, it allows it to do so with a minimum of disruption to financial markets.