Janet L. Yellen

Enhancing Fed credibility

The Feds credibility regarding control of inflation helps to anchor public expectations of price stability. This makes the Feds actions more predictable in any given set of circumstances and thus strengthens the monetary policy transmission mechanism and shortens policy lags. The importance of the Feds credibility can be illustrated by the consequences of its absence in the 1970s. This paper discusses the roots of the Feds current credibility: a systematic approach to controlling inflation, transparency of its policy decisions, and timely communication of the decisions and the considerations upon which they are based. The paper also discusses areas in which there is room for further improvement. It argues that the most important future step would be to adopt specific inflation targets. Such a step would not only enhance credibility, it would help to focus policy-making itself. While there are some risks to establishing specific numerical targets, these risks can be managed and are outweighed by the benefits of explicit targets.

The Mortgage Meltdown, Financial Markets, and the Economy

Abstract