Transition and Continuity at the Federal Reserve

I would like to talk to you tonight about the evolution in the way the Federal Reserve goes about conducting monetary policy. As my title suggests, one theme is that a transition is taking place. Of course, the most striking transition at the Federal Reserve this year is the change in leadership. On January 31, Federal Reserve Board Chairman Alan Greenspan served his last day in office and chaired his last meeting of the Federal Open Market Committee. His successor, Ben Bernanke, took over the following day, and tomorrow morning, he delivers his first testimony to Congress as chairman. Much has been written and said recently about this changing of the guard. It is quite natural in such circumstances for commentators to contrast an influential leader and his successor and to look for likely differences in philosophy and practice. But in my opinion, too much has been made of their differences. Thus, the second theme of my talk: continuity. In remarks upon the announcement of his nomination, Bernanke very deliberately emphasized the stability of monetary policy. He stated that his “first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years.” But I won’t ask you to take his word for it. Tonight, I hope to convince you that a careful student of the Federal Reserve should have good reason to believe that the practice of monetary policy will continue to evolve gradually. I will argue that a certain economic logic has influenced the way policy and practice evolved during the Greenspan years, and that that logic will continue to influence the evolution of policy during the Bernanke years. In particular, the stability of the public’s understanding of and expectations about the future conduct of monetary policy have been central to Chairman Greenspan’s success. As a consequence, the Federal Reserve has found it useful to steadily make the conduct of monetary policy more transparent. This logic is likely to continue to hold sway, and thus the Fed is likely to continue to emphasize credibility and enhanced transparency.