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Alan Greenspan, chairman of the Federal Reserve, is famous for his ability to say nothing and everything at the same time. He and the other members of the Federal Open Market Committee (FOMC), the decision-making body of the Fed, are often criticized for releasing statements that confuse the public and financial markets about Federal Reserve policy; some feel that the Fed should simply keep its mouth shut. What they don’t realize is that until about 15 years ago, that is exactly what it did.

The Federal Reserve has been in existence since 1914, and has been a relatively opaque institution for most of that time. Indeed, most central banks, until recently, believed that secrecy around their decisions was necessary to implement effective monetary policy, following the monetarist argument that only "surprise" movements in interest rates have an impact on the economy. It has only been under Greenspan's tenure as chairman since 1987 that the Fed has moved toward increased transparency in its policy decisions.

Over the last few years, the Fed has taken transparency to a new level, using communication as a tool to implement monetary policy. The Fed has traditionally relied upon its control over the federal funds rate, a short-term interest rate that banks pay to borrow from each other overnight, to influence long-term interest rates and consequently the economy. During the last year, however, it has informed markets through speeches by Fed officials and minutes of FOMC meetings, among others, about its likely interest rate decisions before or sometimes even instead of making them. The Fed has thus been able to move long-term interest rates and affect the economy before actually changing the federal funds rate, and occasionally, without changing it at all.

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