Two Federal Reserve regional bank presidents signaled opposition to a proposal to sharpen monetary policy by linking the Fed’s zero-interest-rate forecast to economic indicators.
“I am concerned that we would create more confusion than clarity,” Philadelphia Fed President Charles Plosser said in a speech yesterday in Washington. Dallas Fed President Richard Fisher said after a speech in Stanford, California, “it’s very difficult for us to state specific employment targets.”
The remarks by the Fed regional bank chiefs underscore the hurdles central bankers face as they seek to forge a consensus on new ways to communicate the outlook for policy. Measures such as inflation and the unemployment rate could augment or replace the current statement that officials expect low rates through at least mid-2015.
Policy makers “generally favored” an approach linking the duration of record-low interest rates to “economic variables,” according to minutes of their Oct. 23-24 meeting released this week. Four Fed officials have advocated this plan, which was first proposed by Chicago Fed President Charles Evans last year.
Evans favors keeping the benchmark rate near zero until the jobless rate falls below 7 percent as long as inflation doesn’t breach 3 percent, while Boston’s Eric Rosengren and Minneapolis’ Narayana Kocherlakota have called for different thresholds. Vice Chairman Janet Yellen this week said she was “strongly supportive” of the idea without endorsing any set of numbers.
San Francisco’s John Williams said this week he is “wrestling” with the best way to communicate the Federal Open Market Committee’s thinking. Plosser and Fisher do not vote on monetary policy this year on in 2013.
Setting numerical benchmarks may lead the public to believe the Fed will tighten as soon as those unemployment or inflation thresholds are met, Williams told reporters Nov. 14. Also, a broad set of data would be needed to accurately size up the economy, he said.
Still, a more qualitative approach that would describe the general conditions needed before a rate increase may be too “vague,” Williams said.
Stocks fell for a third day yesterday as U.S. lawmakers continued to wrangle over how to avoid more than $600 billion in spending cuts and tax increases threatening economic growth. The Standard & Poor’s 500 Index (SPX) declined 0.2 percent to 1,353.33.
Plosser yesterday told reporters after his speech that the Fed has created “a big communications problem” by using different guidance for how long its quantitative easing program will last and how long it will hold rates low.
A better guide would be a “rule-like approach,” he said.
Under this method, the central bank would look at a policy yardstick like the Taylor rule, which estimates what the Fed’s target rate should be based on economic conditions. Yellen has signaled she opposes such a framework.
Such rules don’t offer good policy prescriptions during abnormal economic times like today, Yellen said this week. When the Fed can’t lower its rate any further and the economy faces “persistently strong headwinds,” these rules would suggest policy makers tighten too early, she said.
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