NEW ORLEANS (Thomson Financial) - The communication policy of the Federal Reserve is currently a work in progress and one that needs to be particularly effective in times of market turmoil, Federal Reserve Vice Chairman Donald Kohn said today.
'Because of the uncertainty and fluidity' during times of economic turmoil, the Fed's interest rate setting Federal Open Market Committee 'needs to be aware of the high odds of unanticipated developments as it formulates and discusses policy,' Kohn said today at the American Economic Association/Allied Social Science Associations Annual Meeting here.
Kohn noted the Feds efforts to improve communication in recent months in order to explain the 'unusual actions we have taken,' referring to last month's inauguration of the Term Auction Facility and the surprise cut in the discount rate in August.
In particular, he cited the Feds work to provide 'more information than usual,' to inform the public 'when our views of the macroeconomic situation had changed materially between FOMC meetings,' and to be 'open' in characterizing balance of risks when the outlook is uncertain.
Kohn said that because of current economic uncertainty, speeches of individual FOMC participants have been varied, which has 'bothered market participants seeking clear, unambiguous guidance about the views of the central bank.'
He said the public 'should understand' that FOMC members do not coordinate schedules and their views are likely to be diverse when circumstances are changing quickly.
'The diversity of views on the committee is one of its strengths and vital to arriving at sound decisions,' Kohn said, reiterating his comments from Friday on the benefits of divergent member views.
Kohn also mentioned that when the FOMC decided to revise the ways it makes forecasts, it considered but did not adopt a number of proposals. Among them was a requirement for each committee participant to provide a numerical definition of price stability.
'We believed that the steps we were taking would provide additional information that could help clarify how we viewed price stability that at the same time would allow us to remain consistent with giving information about how we expected to fulfil our dual mandate,' Kohn said.
The FOMC also decided against reporting a range or histogram for participants assumptions about appropriate policy because it was concerned about the public inferring 'more of a commitment to following the implied path than would be appropriate for good policy,' Kohn said. tfn.newsdesk@thomson.com tlm/cbd/wash COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.