Economy Matters

July 28, 2023

As the Federal Reserve works to tame inflation rates that reached their highest levels in more than 40 years, it remains transparent in the reasons for its actions and expectations for the future.

Leaders of the central bank and the 12 Fed districts continue to communicate with the public amid a rigorous debate over the Federal System's response to inflation. Their purpose is to give the public and financial markets information about monetary policy that can reduce economic and financial uncertainty and help households and businesses make better-informed decisions.

It wasn't always this way. Until well into the 1940s, some central bankers around the world contended that monetary policy was best practiced out of the public eye. As the position of global bankers evolved toward more openness, the Federal Reserve's rate-setting committee began in the 1960s to review its information-disclosure practices, moving to release more information to the public, according to a report by the Federal Reserve Board. In 1994, the committee began taking measured steps to further increase its transparency and communication, according to a publication by the Federal Reserve Bank of San Francisco.

This past June, Fed chair Jerome Powell exhibited an outlook of openness in testimony before Congress. In the midst of questions about inflation, unemployment, and bank regulation, he was asked if he had enjoyed the performance of Dead & Company, the successor to the Grateful Dead rock band, where his attendance had been reported by media. "It was terrific. What can I say? It was great," Powell responded. "I've been a Grateful Dead fan for 50 years."

Still, the Fed goes to great length to secure sensitive information. The Federal Open Market Committee (FOMC), the monetary policymaking body of the Federal Reserve System, reaffirmed security provisions for confidential information it uses in making decisions, such as background materials and briefings from senior staff, in an external communications policy.

Atlanta Fed president Raphael Bostic has communicated directly with the public since the outset of the COVID-19 pandemic through his Message from the President series. The essays are available, along with Bostic's speeches, publications, and media interviews, from the president's page of the Atlanta Fed website. As with all Fed statements, Bostic's comments do not offer guidance nor make any promises about future monetary policy.

The essays provide insights into Bostic's thinking about an array of topics related to the economy. Inflation has been a recurring theme since he broached it September 27, 2021, in a piece focused on maximum employment.

On February 1, 2022, Bostic's first essay to focus on inflation provided a link to the Underlying Inflation Dashboard, a tool that shows readers the determinants of inflation the Atlanta Fed monitors. In August 2022, Bostic wrote of the likelihood of future rate hikes, "I don't think we are done tightening." Three months later, he wrote that a recession would be preferred to unacceptably high inflation. In March 2023, Bostic wrote of his preference for raising the federal funds rate to a range of 5 percent to 5.25 percent and leaving it there "well into 2024." In June, he reaffirmed the System's commitment to bring inflation to the 2 percent objective.

The Federal Reserve System Board of Governors releases a host of information regarding the FOMC's actions, including its official statement after each meeting, a link to a video of the chair's news conference, and the implementation note sent to the New York Fed regarding the FOMC's stance on monetary policy. Meeting minutes are released after three weeks. Four times a year, the FOMC releases its Summary of Economic Projections (SEP), identified on the website as Projection Materials.

The dot plot is a visual representation of a quarterly survey of FOMC participants' projections for future federal funds rates.

The FOMC released the first SEP on November 20, 2007. The SEP expanded the breadth and frequency of information the FOMC had provided to Congress on a semiannual basis since 1979, according to an FOMC statement announcing the SEP. Congress required the biannual reporting in the 1978 Humphrey-Hawkins Full Employment Act, according to the San Francisco Fed's publication. The FOMC's purpose in providing the SEP was to "improve the accountability and public understanding of monetary policy making." Then-Chair Ben Bernanke elaborated on the thinking behind the SEP in a November 14, 2007, speech to the Cato Institute.

The SEP's features include a dot plot, a visual representation of a quarterly survey of committee participants' projections for future federal funds rates. Each of the 19 dots represents one of the seven members of the Board of Governors and the 12 Reserve Bank presidents. The dot plot portrays the participants' sentiments on the federal funds rate and is not a promise of where the rate will be set.

Some Fed watchers contend the FOMC releases too much information, including the SEP. Bernanke wrote a 2016 paper published by Brookings expressing sympathy for complaints of "cacophonous" communications, but came down on the side of greater transparency and communication:

The Summary of Economic Projections remains a controversial part of the Fed's communications toolkit, and it has sometimes confused more than enlightened.… That said, in its current form the SEP does provide useful information about the views of FOMC participants and the factors that condition their policy preferences.

The FOMC expressed a similar sentiment in minutes of its May 2-3 meeting:

Participants discussed the importance and various aspects of clearly explaining monetary policy actions and strategy.… A few participants commented that recent monetary policy actions and communications had helped keep inflation expectations well anchored, which they saw as important for the attainment of the Committee's goals. Participants emphasized the importance of communicating to the public the data-dependent approach of policymakers, and the vast majority of participants commented that the adjusted language in the postmeeting statement was helpful in that respect.

David Pendered

Staff writer for Economy Matters