Federal Reserve Bank of Philadelphia President Charles Plosser said the U.S. central bank should be more transparent to increase “the effectiveness of monetary policy” and “accountability with the public.”
“We can and should provide more details about the interplay between economic conditions and policy,” Plosser said in the text of remarks he gave in New York today. “We can also better define our reaction function, to enable the public to better understand and anticipate future policy actions.”
Plosser said the Fed’s adoption in January of an explicit inflation target and release of policy makers’ projections for the appropriate path of interest rates were “important steps forward,” and helped clarify the central bank’s goals. The measures were the latest by Ben S. Bernanke to increase openness and public understanding of the Fed since he became chairman in 2006.
Bernanke has begun holding regular press conferences and voiced his views in television interviews and at town hall meetings. He’s also announced forecasts on economic growth, unemployment and inflation four times a year, up from twice annually under his predecessor, Alan Greenspan.
Plosser said the Fed should go further and give “more information about the linkages among the economic variables and associated policy paths.” That would make it easier for the public to understand the ties between changes in economic conditions and monetary policy, he said.
‘Policy Path Assumptions’
“A natural next step would be to include a matrix of output, inflation, and unemployment, and the associated policy path assumptions that each policy maker submitted,” Plosser said. Currently, it’s “only possible” to tie forecasts together “when individual policy makers choose to reveal such information in their speeches and other public communications.”
Plosser said in response to questions from reporters that his policy-path projection called for the central bank to raise its benchmark interest rate by the end of this year. The Fed has kept the rate near zero since December 2008.
He forecast a 2 percent rate of inflation this year and next, and said that if “inflation keeps drifting up it should be cause for some watchful monitoring.” The personal consumption expenditures price index rose 2.4 percent for the 12 months ending in December, near the Fed’s goal.
“I’m cautiously optimistic,” Plosser said. The drop in the unemployment rate over the past year is “really significant.”
Falling Jobless Rate
The jobless rate fell to 8.3 percent in January, its lowest level since February 2009, and down from 9.1 percent in January 2011. Plosser predicted that the unemployment rate would decline to 7.8 percent in 2012.
The policy path projections “over time will prove to be a far better way to provide information about the path of policy than using calendar dates, as we are currently doing,” Plosser said. “Policy should be conditioned on the state of the economy, not the calendar.”
The policy-setting Federal Open Market Committee said last month its benchmark interest rate will probably stay “exceptionally low” through at least late 2014 to help the recovery gain traction, extending an earlier date of mid-2013.
The Fed should also “do a more comprehensive monetary policy report four times a year,” as “most central banks that have adopted an inflation target have also sought to improve communication and transparency through the publication of a regular policy report,” Plosser said, citing the Bank of England. Bernanke gives Congress a monetary-policy report twice a year, including today.
“The Fed should consider producing a similar report to elaborate and reinforce its policy framework and how it relates to economic conditions,” Plosser said. “These reports will help improve the public’s understanding of policy, which will help make policy more effective and the central bank more accountable.”
Bernanke said today in prepared testimony to the House Financial Services Committee in Washington that keeping monetary stimulus is warranted even as the unemployment rate falls and rising oil prices may cause inflation to rise temporarily.
“At present, with the unemployment rate elevated and the inflation outlook subdued, the committee judges that sustaining a highly accommodative stance for monetary policy is consistent” with promoting the Fed’s two objectives of stable prices and maximum employment, Bernanke said today.
Bernanke said the FOMC’s announcement of a 2 percent inflation target in January was aimed at providing “additional transparency” and did “not imply a change in how the committee conducts policy.” The Fed chairman said at times when the inflation and full employment goals are not complementary, the FOMC “follows a balanced approach in promoting them.”
While stating its 2 percent inflation target was a positive step, Plosser said “it is not appropriate for the central bank to set an explicit numerical goal for the maximum employment part of our mandate,” because that rate is determined by factors that are beyond the Fed’s control, such as demographics and productivity.
Plosser said if the Fed gave more details on how it reacts to changing economic indicators, it would make monetary policy more “systematic” and impose “an important discipline” on central bankers.
“If we choose a consistent set of variables and systematically use them to describe our policy choices, the public will have a greater ability to form judgments about the likely course of policy,” Plosser said. “This would reduce uncertainty about policy and promote stability.”
He also reiterated his view that the Fed must protect its independence, which is “now under attack” because of fiscal imbalances and because the central bank engaged “in credit allocations to particular sectors, such as housing, and bailouts to particular firms” like Bear Stearns Cos.