Federal Reserve Bank of Philadelphia President Charles Plosser said the Fed can promote its credibility and independence by being clearer about how it adjusts policy according to changes in the economy.
The Federal Open Market Committee has sought for years to improve transparency, most recently in January by setting an inflation goal of 2 percent and publishing the interest rate projections for participants on the policy-making panel.
“The steps taken in January are important steps forward for the FOMC, but more can and should be done,” said Plosser, a member of Chairman Ben S. Bernanke’s working group on communications.
Policy makers last month repeated their outlook for an “exceptionally low” federal funds rate through late 2014. At an April 24-25 meeting FOMC participants plan to update their forecasts for inflation, employment and growth.
“The committee’s description of how policy will be conducted is not entirely clear,” Plosser said. The Fed should aim to follow a “systematic” policy rule whereby changes in the economy prompt predictable responses by the central bank.
“The better the public and the markets understand how policy is likely to be adjusted as the economy changes, the more predictable policy becomes, Plosser said to the National Economists Club in Washington. Transparency promotes price stability and better economic outcomes, he said.
Pushing Down Unemployment
Plosser, who didn’t comment extensively on the Fed’s policy stance, said the economy will probably expand 3 percent this year, with growth gradually pushing down the unemployment rate.
Under such conditions, he said, further bond purchases by the central bank wouldn’t have “a lot of coherence” with past Fed actions. The central bank launched a second round of quantitative easing in November 2010 at a time when the unemployment rate was 10 percent and the personal consumption expenditures price index was 1.2 percent.
The gauge rose 2.3 percent for the 12 months ended in February. The unemployment rate fell to 8.2 percent in March from 8.3 percent in February.
The Philadelphia Fed chief said FOMC participants probably aren’t ready to adopt a policy rule. Still, they could probably agree on which economic variables merit the largest policy response, he said. For example, policy could react aggressively to deviations in inflation, and less so to deviations in output based on estimates of potential.
The FOMC could also improve communications by publishing a quarterly monetary policy report, said Plosser, a non-voting member of the committee this year.
Fed Vice Chairman Janet Yellen, and New York Fed President William Dudley this week endorsed the central bank’s view that borrowing costs are likely to stay low through late 2014 as the Fed misses its goal for full employment and inflation remains in check. Yellen and Dudley have voting power on the FOMC.