(Bloomberg) — Cleveland Federal Reserve President Loretta Mester said the U.S. central bank should consider ways to better communicate to the public how economic conditions will affect future policy decisions.
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Speaking in Tokyo on Tuesday, Mester recommended two key changes: adding more words to the Fed’s post-meeting policy statement – to describe how officials assess economic developments and potential risks to the outlook – and more detail to its quarterly summary. policymakers’ economic forecasts. .
“Improvements in communications would make monetary policy more effective in normal times and would also improve the effectiveness of unconventional policy tools, such as forward guidance, in extraordinary times,” she said in prepared remarks at a conference hosted by the Bank of Japan.
The Cleveland Fed chief, who votes on the Fed’s policy-setting committee this year, said she expects officials to consider communications as part of the five-year review of its policy framework, expected to begin in late 2024. She did not commented on the outlook for the economy or interest rates.
Mester said increasingly shorter political statements, while often seen as a virtue, can also be problematic as each word takes on additional meaning. They can also make it more difficult for the public to see the connection between economic developments and political decisions.
She said it would be better for policymakers to “take control of the narrative” and use more words to describe how economic developments have affected the outlook and the potential risks to that outlook.
Placing more emphasis on risks “would give market participants and the general public a better sense of the contingent and data-dependent nature of policymaking and increase central bank credibility to the extent that a change in policy would be seen less as a breach of promise,” she said.
Mester also said that scenario analysis — or describing how different scenarios would lead to different policy actions — should also be a standard part of the Fed’s communications.
“This could be particularly useful in periods like today, when the underlying structural elements of the economy may have changed,” she said.
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The Fed should also consider publishing an anonymous matrix that links policymakers’ forecasts for interest rates — often referred to as a “dot plot” — with their projections for growth, unemployment and inflation in its forecast. Summary of Economic Projections, said Mester.
“Currently, the variables in the SEP are not interlinked across participants and the median paths provided do not necessarily represent a coherent prediction,” she said.
Connecting the dots would give the public a better sense of how each individual official would adjust policy based on changing economic conditions, Mester said, echoing an argument that Chicago Fed President Austan Goolsbee also made in May.
Mester will step down as president of the Cleveland Fed in June when his term expires.
Balance sheet
Speaking on the same panel, Fed Governor Michelle Bowman focused her prepared remarks on the Fed’s balance sheet, the reduction of which “proceeded relatively smoothly,” she said.
Fed officials will slow the pace of balance sheet reduction starting next month and have said they intend to stop when the level of bank reserves is just above a level they consider ample.
“In my opinion, we are not at that point yet,” Bowman said, adding that he would have supported waiting to slow the pace of asset outflows or implementing a more gradual slowdown.
“In my opinion, it is important to continue to reduce the size of the balance sheet to achieve ample reserves as quickly as possible and while the economy is still strong,” she said. “Doing so will allow the Federal Reserve to use its balance sheet more effectively and credibly to respond to future economic and financial shocks.”
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