In August 2011, we added a particular type of forward guidance to our policy, first saying we would likely keep rates low until mid-2013 and then, in January, indicating that sub-par economic performance would likely warrant exceptionally low rates until at least late 2014. Working to complement these efforts and to improve FOMC communications more generally, we also added two major communications initiatives: A statement of our monetary goals and long-run strategies, and publication of FOMC participants’ projections for the federal funds rate. 1  Krugman (1998). 2  See, for example, Bernanke, Reinhart and Sack (2004) and Eggertsson and Woodford (2003). BIS central bankers’ speeches  1  I have strongly supported each of these developments, believing that they improved transparency and also provided welcome further monetary accommodation for the U.S. economy. However, as I have been talking about in public for some time, I think there are additional tools we could use to deliver more effective policy accommodation. In particular, I would like to see our forward guidance take a different form – one that explicitly ties liftoff in the funds rate to observable economic outcomes (You can think of this as a Ulysses-type forward guidance: We tie ourselves to the mast to avoid the siren calls of premature tightening.)
As I will talk about shortly, I believe such policy could provide more clarity about our attitudes toward providing monetary accommodation – and would be more in line with a structure I would have preferred to have seen in our August 2011 and January 2012 actions. This policy also can be structured in a way that would represent a balanced risk-management approach to achieving the dual goals of maximum employment and stable prices that the United States Congress has mandated to the Federal Reserve. Communications enhancements First, though, I’d like to discuss the Fed’s latest initiatives to enhance communications. As an accountable central bank in a democratic society, the Federal Reserve has an obligation to clearly articulate what it is trying to achieve with monetary policy. I believe that our latest communications efforts are an important step in further increasing such accountability to the public, as they reaffirm our commitment to both legs of the dual mandate and describe the ways in which we will seek to achieve those objectives. The framework statement Let’s start with the framework statement of our policy goals and long-run strategy. The framework clarifies how the FOMC interprets our statutory responsibilities for facilitating maximum employment and price stability in terms of measurable and achievable economic goals that we aim for over the longer run. We say that the Committee sees a rate of inflation of 2 percent over the long run as being consistent with the price stability leg.