Question

The Federal Reserve didn't always communicate its actions to the public like it does today. As recently as the mid 1990s, secrecy ruled. Why do you think the Fed and most central banks now are more public about their actions and the reasons for them?

a) Increased public demand for transparency.
b) International pressure for open communication.
c) Recognition of the benefits of transparency.
d) Legal mandates for public disclosure.

Answer 1

The Federal Reserve's transparency is a product of the recognition of its benefits, increased public demand, international communication standards, and legal mandates established in the 1990s. Transparency helps prevent financial panics by ensuring public trust and allows for the Fed to better explain and achieve its goals, such as stable prices and maximum employment.

Step-by-step explanation:

The Federal Reserve and most central banks are more public about their actions and reasons for them due to several factors. One major factor is the recognition of the benefits of transparency, which includes fostering a stable financial environment and maintaining public trust in the monetary system. Also influential was the public's increased demand for transparency and the international pressure for open communication resulting from globalization. Finally, legislative changes in the 1990s, requiring bank supervisors to disclose their findings and act promptly on identified problems, played a significant role in bringing about this shift in policy.

Transparency helps in preventing financial panics, which commonly occur when the public feels uncertain about the financial stability of their investments and rush to withdraw their funds. By being open about policies and objectives, the Federal Reserve aims to prevent such panics by reassuring the public and the markets. The Fed's approach to monetary policy, supervision, and regulation has evolved markedly and includes measures like expanding its holdings of longer-term securities to support economic activity and job creation by making financial conditions more accommodative.

Moreover, transparency allows for accountability, particularly after the 2008-2009 recession, when critics questioned why regulators had not identified and addressed the financial vulnerabilities of banks before large losses accrued. By being transparent, the Fed can also better communicate its role in achieving original goals such as maximum employment, stable prices, and moderate long-term interest rates.