LOUISVILLE, Ky (Reuters) - The Federal Reserve, which has taken already taken extraordinary steps in the past couple of years to provide greater transparency, is considering a range of ways to sharpen its communication on the possible future course of monetary policy.
Some officials are advocating fuller and more frequent monetary policy reports that, ideally, would provide financial markets greater clarity about how the Fed would adjust its policy to changing economic circumstances, and give some sense about probability.
The goal would be fewer misunderstandings or surprises about Fed policy, less volatility in markets and more confidence in long-range planning.
The Fed in recent years engineered communication enhancements to both shed its image as a secretive institution deliberating behind closed doors and improve the effectiveness of monetary policy.
Publishing a quarterly report "could potentially provide a more fulsome discussion of the outlook for the U.S. economy and for policy," James Bullard, president of the St. Louis Federal Reserve Bank, said on Wednesday.
Minutes of Fed meetings in March and April show policymakers considering a range of expanded communications options, with no decisions taken.
A source familiar with the Fed's deliberations said officials were mulling the possibility of quarterly monetary policy reports. The Fed currently delivers reports to Congress twice a year on the policy and economic outlook.
At the central bank's meeting last month, Fed Chairman Ben Bernanke asked officials making up a communications subcommittee to play with the idea of refining the quarterly economic projections policymakers provide to clarify links between changes in economic conditions and the views officials hold about the appropriate monetary policy course.
Fed officials also considered describing the likely monetary policy responses to various economic scenarios, and releasing that information publicly, minutes of the April meeting show.
"Often, opinions about the future course of the economy change quickly when it is at a turning point," said Ann Owen, a former Fed economist who teaches at Hamilton College, in Clinton, New York.
"Managing expectations about the future state of the economy can help it achieve its goals of full employment and price stability because expectations about the economy can be self-fulfilling," she said.
A risk would be that the additional information would muddle an already complicated picture that at the end of the day can change in response to a sudden turn of events.
Another is that by laying out its thinking in greater detail, the Fed is tying its hands by raising expectations that it would act in certain ways. Any perceived deviation from its most likely policy path could then raise questions about the Fed's credibility.
The Fed was once an institution that didn't even communicate its policy moves to the public - changes had to be inferred by price moves in Treasury debt markets after policy meetings. The financial crisis of 2007-2009 drew attention to the vast reach of the Fed's powers and raised pressure on the institution to divulge details of its extensive emergency lending.
Bernanke last year launched four-times-a-year news conferences and increased the publication of economic projections to quarterly from twice a year. The Fed this year took a page from many other central banks by announcing an explicit inflation target, a move seen as inoculating against the possibility of an inflationary psychology by more firmly committing policymakers to price stability.
It has began recently to publish individual policymakers' rate path forecasts.
As with the inflation target, the Fed seems to be taking its cue on more frequent and more detailed monetary policy reports from other central banks.
Minneapolis Fed President Narayana Kocherlakota last week held up Sweden's monetary policy reports, issued thrice yearly, as a model from which the Fed had much to learn.
"We need to do more to communicate the economic uncertainties that we face as policymakers and how our policymaking will respond to new information about those uncertainties," he said.
A quarterly report - possibly timed to coincide with the chairman's news conferences - could lay down a benchmark of the Fed's view on key issues facing the U.S. economy, Bullard said on Wednesday.
By showing how individual Fed officials differ from the benchmark, such reports could communicate a more nuanced view of shifting sentiment.
"Right now, the Fed has communicated clearly that it does not expect to raise the federal funds rate until sometime in 2014," Hamilton College's Owen said. "If there were some suggestion in a quarterly report that perhaps there is less certainty about that timing because the pace of the recovery has quickened, then this could have the effect of increasing expectations for higher rates sooner."
Additional reporting by Ann Saphir in Chicago and Jonathan Spicer in New York; Editing by Leslie Adler