Tags: Fed | Plosser | rules | guidance

Fed's Plosser Says Rules-Based Policy Is Best Form of Guidance

Tuesday, 25 Mar 2014 07:32 PM

Federal Reserve Bank of Philadelphia President Charles Plosser said the Fed should adopt a more systematic, rules-based approach to policy to reduce investor uncertainty and promote market stability.

“If we choose a consistent set of variables and systematically use them to describe our policy choices, the public will form more accurate judgments about the likely course of policy,” Plosser, who votes on policy this year, said today in the text of a speech prepared for delivery in New York. He didn’t comment on his outlook for the economy.

“Many robust rules now suggest that given the progress the economy has made over the past year, policy either is no longer constrained or will soon not be constrained by the zero bound,” Plosser said, referring to how the Fed has held the main interest rate near zero since December 2008. “They indicate that the policy rate should be above zero.”

The Federal Open Market Committee, having pared the pace of bond buying in $10 billion increments in three straight meetings to $55 billion a month, last week reaffirmed its commitment to keep the federal funds rate low for a “considerable time” after ending asset purchases.

“Even if the FOMC were not prepared to choose a particular rule, it could articulate more clearly a qualitative reaction function that would serve as a baseline for future changes in policy as we exit the zero lower bound,” Plosser said. “Doing so would be a more understandable form of forward guidance, less subject to misinterpretation as policy transitions from unusual times to more normal times.”

‘Wide Range’

The FOMC said March 19 it will look at a “wide range of information” in deciding when to raise its benchmark interest rate, dropping guidance tying borrowing costs to a 6.5 percent unemployment rate.

The Fed last week also released new economic projections showing that officials expect higher interest rates by the end of 2015 and 2016 compared with estimates released in December. Their projections show they expect their target interest rate will be 1 percent at the end of 2015.

Atlanta Fed President Dennis Lockhart said today “the second half of 2015 is a reasonable time frame in which we might get to lift off” in the main rate from a record low.

The Fed will probably begin to raise the main rate more than six months after halting bond purchases, Lockhart, who doesn’t vote this year, said in response to questions in a forum in Atlanta.

Plosser, 65, has led the Philadelphia Fed since August 2006. He was previously dean of the graduate school of business administration at the University of Rochester in New York.

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Federal Reserve Bank of Philadelphia President Charles Plosser said the Fed should adopt a more systematic, rules-based approach to policy to reduce investor uncertainty and promote market stability.
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2014-32-25
Tuesday, 25 Mar 2014 07:32 PM
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