(Reuters) – Federal Reserve policy statements would benefit from somewhat lengthier passages than currently employed to describe assessments of economic developments, how that influences the central bank’s outlook and the risks to that outlook, Cleveland Fed President Loretta Mester said on Tuesday.
“While simpler is often seen as a virtue, it can also be a detriment, since policymaking has to be done in an uncertain world, one in which the economy is constantly being buffeted by shocks that can lead economic conditions to evolve differently than anticipated,” Mester said in remarks prepared for delivery to a Bank of Japan conference in Tokyo. “With short statements, each word takes on added significance.”
Fed policy statements have become shorter under the leadership of Chair Jerome Powell, and Mester – who is retiring next month – said that is not always the best choice. “Short statements suffer from what I call a ‘Hotel California’ problem: We are reluctant to change particular words because of the possible signal that doing so may send,” she said, referencing the hit 1970s song by the Eagles. “Words ‘check in’ but it is hard to get them to ‘check out’ even when it is desirable.
“In my view, it would be preferable for policymakers to take control of the narrative by using more words to describe the current assessment of economic developments, how they have influenced the outlook, and the risks to that outlook,” she said.
Another improvement to Fed communications would be the introduction of an “anonymized matrix” of economic and policy projections alongside the Summary of Economic Projections, or SEP, published each quarter. The SEP most notably includes a “dot plot” showing the range and clustering of policymakers’ projections for the appropriate level of interest rates.
By publishing such a matrix “market participants can see the linkage between each participant’s outlook and his or her view of appropriate monetary policy associated with that outlook,” Mester said. “Currently, the variables in the SEP are not linked across participants, and the median paths provided don’t necessarily represent a coherent forecast. For example, there is no guarantee that someone projecting the median inflation path would necessarily be projecting the median output path.”
The recommendations from Mester – which she dubbed “use your words” and “connect the dots” – come ahead of a planned monetary policy framework review that Powell has said will start later this year and likely stretch into 2025. Mester expects the Fed will consider its communications strategy as part of the review.
Content Source: www.investing.com