Thirty years ago and further, before 1994, the Federal Reserve did not make any announcement at all when it altered monetary policy. Instead, market-watchers had to detect changes in interest rates as they occurred. Now, the Fed announces a target range for the specific interest rate that it targets (the “federal funds interest rate”) and holds a press conference to explain its choice. The Fed also releases a Summary of Economic Projections, which reports 19 different projections of key economic variables from the 19 participants in meetings of the Federal Open Market Committee. The Fed publishes minutes of FOMC meetings with a three-week lag. Members of the seven Fed Board of Governors in DC as well as presidents of the 12 regional Federal Reserve banks often comment on the reasoning behind the Fed’s policy choice during Congressional testimony and speeches as well.
Should the Fed be taking addition steps to explain its choices more fully? Ben Bernanke (Nobel ’22) offers some ideas in “Improving Fed Communications: A Proposal,” presented at the Fed’s Second Thomas Laubach Research Conference (May 15-16, 2025, full text, audio, and video for the six research papers and other presentations available at the website).
For a sense of what is at stake, Bernanke notes the positive aspect of communication when he writes: “Effective communication—about what the Fed sees in the economy and how it plans to respond—helps households and businesses better understand the economic outlook, clarifies and explains the Fed’s policy strategy, and builds trust and democratic accountability.”
Lest this comment sound like boilerplate, it is perhaps useful to note that, as I see it, the opposite of this statement is also true. That is, one could restate Bernanke’s comment: “Ineffective communication—about what the Fed sees in the economy and how it plans to respond—makes it harder for households and businesses to understand the economic outlook, muddles perception of the Fed’s policy strategy, and diminishes trust and democratic accountability.”
Bernanke proposes one main change to Fed communications practices. As he points out, it’s common for other central banks around the world to present an actual economic forecast, with the underlying assumptions and calculations spelled out. A quarterly forecast could also include discussion of the range of uncertainty, and alternative scenarios that might emerge. Bernanke writes:
The centerpiece … would be forecasts of key economic and policy variables at varying horizons, drawn from a comprehensive macroeconomic forecast led and “owned” by the Board staff (possibly with some input and commentary from policymakers …). Because the underlying forecast would be internally consistent and based on explicit economic assumptions, it would provide greater insight than the projections of individual FOMC participants into the factors affecting the outlook for the economy and policy. Critically, a fully articulated baseline forecast would also facilitate the public discussion of economic scenarios that differ from that baseline. Besides highlighting the inherent uncertainty of economic forecasts, the publication of selected alternative scenarios and their implications could facilitate a subtle but important shift in the Fed’s communications strategy. Specifically, it would allow the FOMC to provide policy guidance that is more explicitly contingent on how the economy evolves, underscoring for the public that the future path of policy is not unconditional (“on a preset course”) but depends sensitively on economic developments and risk management considerations.
For a sense of how this might work in practice, Bernanke refers back to the public discussion in 2021 of whether the surge of inflation was transitory.
To illustrate the use of alternative scenarios in communication, suppose—with a large dose of hindsight—that in mid-2021 the Fed had not, figuratively speaking, put all its chips on its central forecast that inflation would prove “transitory” but instead had said the equivalent of: “For the following reasons we think that the most likely scenario is that the increases in inflation will be transitory. However, should inflation prove to be higher and more persistent, perhaps for these reasons, our response would be to do this [where “this” could be a projected path for rates and the balance sheet, perhaps described only qualitatively]. Similarly, if inflation sinks lower than in the modal forecast, we expect to do that.” Even if lacking in quantitative details, a more explicitly conditional approach would have better conveyed to the public the intrinsic uncertainty of the outlook, and discussion of the reaction function would have provided the public some advance notice about how the Committee would likely respond in less probable but still plausible scenarios.
On one side, it’s hard to quarrel with the idea that the Fed should seek to spell out its thinking more fully. Other central banks around the world do so. Open and honest communication is a beautiful thing, and Bernanke’s proposal seems sensible to me.
On the other side, how easy will it be for the Fed to acknowledge when it is wrong, or to explain that projections of a certain scenario turned out differently in the real world? The Fed is probably strongest when it is perceived to be sticking to the pursuit of its goals of stable prices and maximum employment. If and when the Fed starts producing economic forecasts and scenarios, it will be even more open to the accusations and reality of political lobbying and motivations. Even setting politics aside, the instinct to defend past predictions, or to make a range of predictions vague enough that they become unfalsifiable, are real things, too.
