Federal Reserve Chairman Ben S. Bernanke said the central bankis likely to rely more on public communications as a policy tool asit seeks to provide clarity about the likely future path ofinterest rates.

“The FOMC continues to explore ways to further increasetransparency about its forecasts and policy plans,” Bernanke saidtoday in a speech in Boston. “Forward guidance and other forms ofcommunication about policy can be valuable even when the zero lowerbound is not relevant, and I expect to see increasing use of suchtools in the future.”

Bernanke and his colleagues on the Federal Open Market Committeehave approved untested policy tools at their last two meetings tospur a recovery that has left the unemployment rate stuck near 9percent or higher for 30 consecutive months. The central bank inAugust pledged to hold interest rates near zero until mid-2013, andin September the Fed announced it will swap $400 billion ofshort-term debt for longer-term securities in a bid to lowerinterest rates.

Unable to lower interest rates below zero, the central bank hasrelied on forward guidance about its intentions and manipulation ofthe size and composition of its assets to provide stimulus to theeconomy, Bernanke said.

Policy makers are weighing how to offer more information aboutthe Fed's goals, and how such targets influence its decisions. MostFOMC members favor providing more information than the economicforecasts the Fed publishes quarterly, according to minutes of theSept. 20-21 session. The FOMC has established a working group tostudy transparency initiatives.

'Normal Times'

“In more normal times, when short-term policy rates are notconstrained, I expect that balance-sheet policies will be rarelyused,” Bernanke said in a speech at the Boston Fed's annualeconomic conference.

Dallas Fed President Richard Fisher, Narayana Kocherlakota ofMinneapolis and Charles Plosser of Philadelphia dissented from thedecisions at the Fed's last two meetings. Fisher, who has dubbedthe Fed's Operation Twist “jujitsu with the yield curve,” said in aSept. 27 speech that the central bank's recent moves “are likely toprove ineffective and might well work against job creation.”

Kocherlakota said in a speech last week that “the committee'sactions at the last two meetings are inconsistent with a systematicpursuit of its communicated objectives,” noting that unemploymentof 9.1 percent in September was down from the 9.8 percent reportedin November while most measures of inflation have risen.

Long-Run Estimates

Currently, the FOMC publishes its range of long-run estimatesfor gross domestic product, unemployment and inflation, a proxy forpolicy goals. The range for inflation in June, for example, was 1.7percent to 2 percent as measured by the personal consumptionexpenditures price index. The range for unemployment was 5.2percent to 5.6 percent.

The Fed has drawn criticism from top Republican lawmakers, whosent Bernanke a letter before the last meeting asking him not to do“further harm” to the economy and to better explain the Fed'sactions.

Lawmakers, including House Speaker John Boehner and SenateMinority Leader Mitch McConnell, urged Bernanke to refrain fromfurther monetary stimulus, “particularly without a cleararticulation of the goals of such a policy” and “ample data provinga case for economic action.” Americans, they said, “have reason tobe skeptical” of his plans.

Flexible Targeting

While the Fed lacks a “formal, numerical inflation target,” itspolicies have “many of the elements of flexible inflationtargeting,” Bernanke said. “Like flexible inflation targeters, theFederal Open Market Committee is committed to stabilizing inflationover the medium run while retaining the flexibility to help offsetcyclical fluctuations in economic activity and employment.”

Policy makers' long-run inflation projections are “analogous” totargets even though they aren't a “formal inflation goal of theCommittee as a whole,” Bernanke said.

Flexible inflation-targeting has helped the Fed in manageexpectations about prices, Bernanke said.

“The commitment to a policy framework that is transparent aboutobjectives and forecasts was helpful, in many instances, inmanaging those expectations and thus in making monetary policy bothmore predictable and more effective during the past few years thanit might otherwise have been.”

Bernanke also said that monetary policy may be “too blunt atool” to control asset-price bubbles. Instead, he said, measuressuch as ensuring adequate bank capital and liquidity “should beused to address developing risks to financial stability, such asexcessive credit growth.”

10-Year Yields

The yield on 10-year Treasuries fell to a record close of 1.72percent the day after the Fed announced its program to lengthenmaturities of the bonds in its portfolio, known as Operation Twist.The yield has since risen to 2.18 percent as of 4:51 p.m. in NewYork. Lower yields may help reduce borrowing costs across theeconomy, boosting industries including autos and housing.

Investors have raised their bets for price gains in recentweeks, as measured by the difference between inflation-adjusted andnominal Treasury securities over the next 10 years. Thoseexpectations rose to 1.99 percent inflation today. That's up from1.71 percent, their lowest level of 2011, on Sept. 22, the dayafter the Fed announced Operation Twist.

“Low interest rates for the entire industry is one of thereasons that we think that despite some economic volatility, theauto industry in general continues to be a bright spot in theeconomy, and we expect that to continue,” Robert Carter, U.S. salesvice president for Toyota Motor Corp., the world's largestcarmaker, said during an Oct. 3 conference call.

Bloomberg News

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