What WERE they thinking? This is a response all too commonly made regarding decisions made by government organizations. Now the U.S. Federal Reserve has announced it will provide better transparency to the public to improve businesses and consumers’ understanding of the central banking system’s objectives and strategies.

The United States Federal Reserve has announced it will offer more information to help businesses and consumers plan and manage.

“A considerable amount of evidence indicates that central bank transparency increases the effectiveness of monetary policy and enhances economic and financial performance in several ways,” Ben S. Bernanke, chairman of the Board of Governors, said in a speech at the Cato Institute 25th Annual Monetary Conference yesterday.

Perhaps Bernanke tired of people trying to read more into his every utterance than each word meant. Or maybe, in an era of global competition, the chairman feels we need all the help we can get.

Either way, and in practical terms, the Fed says it will give economic projection reports four times annually, and the thinking that occurs at the meetings — as represented by the comments made — will be released. The rationale is this, according to Chairman Bernanke’s speech yesterday:

• Improving the public’s understanding of the central bank’s objectives and policy strategies reduces economic and financial uncertainty and thereby allows businesses and households to make more-informed decisions.

• Open discussion of the central bank’s analyses and forecasts invites valuable input and feedback from the public.

This increased openness is a welcome development for several reasons.

Monetary policy makers are public servants whose decisions affect the life of every citizen. As such, they have a responsibility to give the people and their elected representatives “a full and compelling rationale for the decisions they make,” Bernanke noted in his speech. “Good communications are a prerequisite if central banks are to maintain the democratic legitimacy and independence that are essential to sound monetary policy making.”

Policy makers have adopted a number of methods — timely announcements of policy actions, expanded testimony before legislative members, release of minutes of policy meetings, frequent public speeches and the regular publication of reports about the economy and monetary policy — all to improve their communication with the public.

Long kept from public scrutiny, now each of the participants in the Federal Open Market Committee (FOMC) meeting — including the Federal Reserve Board members and all the Reserve Bank presidents — will provide projections for the following:

• Growth of real gross domestic product (GDP);
• Unemployment rate;
• Overall inflation; and
• Core inflation (excluding food and energy still).

The inflation predictions will flow from the price index for personal consumption expenditures. Moreover, “summaries of participants’ views of the major forces shaping the outlook” along with “discussion of risk to that outlook” and a description of “the dispersion of views among policymakers” will be available. The Fed also will extend its forecast horizon to three years.

Because “future economic disturbances are often unforeseeable,” Bernanke said, “economic forecasting is a highly uncertain enterprise.”

For now, though, the outlook for the rest of 2007 and the first quarter of 2008 includes GDP of 1.6 for this year and 1.9 for early 2008, as reported by The Wall St. Journal.

At first glance this seems anemic, but considering the sub-prime meltdown and weak dollar, perhaps we should be thankful for even the slight growth. “When the Fed tries to perk up the economy by cutting interest rates, as it has done twice recently, it makes the dollar even less attractive because investors can get better rates in other currencies, such as the euro,” explains Fortune magazine (via CNN Money), which goes on to note:

Warren Buffett told us all this would happen. In mid 2002, for the first time in his life, he began buying foreign currencies, thus betting against the dollar. He explained his reasons most extensively in a Fortune article he wrote which was published Nov. 10, 2003. The main factor he cited, the trade deficit, is much worse now. For a year or two after the article, his bet seemed to be a loser. But now, as usual, he looks prescient.

Personal income increased $47.4 billion, or 0.4 percent, and disposable personal income increased $40.6 billion, or 0.4 percent, in September, according to the Bureau of Economic Analysis. But retail sales slowed as expected during October, a sign consumers were showing caution on the approach to the holidays. Meanwhile, wholesale prices registered just a slight gain last month.

Resources

Federal Reserve Communications
Ben S. Bernanke
Federal Reserve, Nov. 14, 2007

Forecasts: Quarterly Gross Domestic Product
The Wall Street Journal, Nov. 14, 2007

What’s Sinking the Dollar
by Geeff Colvin
Fortune (via CNN Money), Nov. 13, 2007

Personal Income and Outlays
United States Bureau of Economic Analysis, Sept. 2007

Retail-Sales Growth
The Wall Street Journal, Nov. 14, 2007