If the FOMC did not make this adjustment, the stronger dollar could result in an undesired tightening of U.S. financial conditions. The expected forward interest rate paths in Europe and Japan have fallen considerably this year. If the FOMC had followed the median federal funds rate path from the December 2015 SEP projection, then the U.S. dollar would likely have appreciated much more significantly. Instead, the U.S. interest rate path has come down in tandem with the foreign interest rate paths and the dollar has appreciated only modestly. BIS central bankers’ speeches  3  This is a crucial point and I want to make sure there is no misunderstanding. The Federal Reserve is not targeting the exchange value of the U.S. dollar. What the FOMC considers are financial conditions broadly defined, because they affect the saving and investment decisions of households and firms. The dollar is but one component of these financial conditions. The level of short- and long-term rates, credit spreads, and equity prices are also important components of the financial conditions that we closely monitor. If international developments shift U.S. financial market conditions – including the dollar – then we need to take this into consideration in our U.S. monetary policy decisions. Third, I have found that market participants broadly appreciate that the FOMC needs to take a risk management approach in its conduct of monetary policy. There are at least two important aspects of this approach.
With respect to communication, in recent years the Federal Reserve has shifted towards much greater transparency. This includes quarterly press conferences by the Fed chair following FOMC meetings; publishing growth, inflation and short-term interest rate forecasts of FOMC participants on a quarterly basis; and a concerted effort to lay out the guideposts that the FOMC will look at in assessing progress towards our dual mandate objectives. On the communication front, although we have come a long way, I would admit that there is still room for further improvement. For example, the focus of the SEP on the each participant’s modal forecast does not convey how much uncertainty there is about the economic outlook. Similarly, language used in FOMC statements can become stale over time. We tend to make relatively few changes to the statement language each meeting because of the acute market sensitivity to such changes. One could argue that this might not be the best practice to follow, but we should recognize that there would also be significant transition costs if we were to make more extensive revisions to the statement at each meeting. 6  BIS central bankers’ speeches  For monetary policy to be effective, it is important to have clarity about what the FOMC can be clear and consistent about – its manner of responses to mitigate the potential harmful effects of disturbances and the goals of policy. In contrast, our monetary policy projections and the actions we take cannot be static.