Some economists believe that the Federal Reserve should follow strict rules for the conduct of monetary policy. These rules would require the Fed to make adjustments to interest rates based on information that is fully available to the public, such as the current unemployment rate and the current inflation rate. What are the pros and cons of such an approach?
Adopting a strict rules of conduct and transparency would eliminate unnecessary market uncertainties and volatility, and minimize the costs of anti-inflation monetary policy. Transparent monetary policy is characterized by openness and a lack of secrecy and ambiguity. Transparency is multi-dimensional and includes the clarification of policy goals, of policy procedures, and the timeliness in reporting policy decisions. More transparent monetary policy has a number of advantages. It can work to (1) clarify policy objectives, (2) improve the workings of financial markets, (3) enhance central bank credibility, (4) reduce the chances of monetary policies manipulation for political purposes, (5) foster better monetary policymaking, and (6) complement congressional monetary policy oversight ...
Pros and cons of a transparent monetary policy