Making the Systematic Part of Monetary Policy Transparent

Significant additional transparency by the Federal Open Market Committee (FOMC) could involve explicitness about objectives, especially an inflation target. Explicitness about objectives, however, is incomplete without explicitness about the strategy for achieving those objectives, that is, about the consistency in the way that the FOMC changes the funds rate in response to incoming information. Consistency in this response (a policy rule) is necessary to ensure that the yield curve responds in a stabilizing way to macroeconomic shocks. The desire of former FOMC chairmen Paul Volcker and Alan Greenspan to re-anchor inflationary expectations, which had become unmoored in the period of stop-go monetary policy, imposed an overall consistency on the monetary policy followed during their tenures. This consistency can constitute the basis for an explicit monetary policy rule.