The Federal Reserve’s guidance on the outlook for policy should stress that changes in interest rates depend on shifts in the economy, said Loretta Mester, president of the Cleveland Fed.
“I favor the committee being as clear as it can be that monetary policy will be contingent on the state of the economy,” Mester, who votes on policy this year, said in speech in New York. “I favor putting less focus on a particular calendar date for liftoff.”
Mester said it was “an important step in the right direction” when the Federal Open Market Committee last week added language to its statement that rates could rise sooner if progress toward its goals is faster than expected and increase later if progress disappoints.
Fed officials debating when to raise interest rates for the first time since 2006 are weighing how to overhaul their communications policy. Last week, they ended their third round of asset purchases while retaining a pledge to keep rates low for a “considerable time.” Most officials expect to raise rates next year.
“After several years of nontraditional monetary policy, the transition toward a more normal economy is likely to entail some uncertainty about monetary-policy setting,” said Mester, who is a member of a subcommittee on communications headed by Fed Vice Chairman Stanley Fischer.
“I believe clear policy communications can and should play a key role in reducing that uncertainty,” she said.
Mester also said the Summary of Economic Projections released quarterly could be amended to “play a central role in helping the public better understand how policy is likely to respond to economic developments.” The SEP contains forecasts for growth, unemployment, inflation and the federal funds rate without identifying the officials making individual projections.
“The SEP could be enhanced by linking the variables for each participant’s projection so that the public could see what each policy maker is projecting” as well as “what policy path he or she believes will achieve those outcomes,” Mester said. “This could be done without revealing the identities of the participants and would convey information on each individual policy maker’s reaction function.”
The Fed aims for full employment along with inflation of about 2 percent. The jobless rate fell to 5.9 percent in September, while consumer prices rose 1.4 percent from a year earlier, as measured by the Fed’s preferred gauge. Inflation has remained below the goal for 29 months.
Speaking to reporters after the speech, Mester said she expects inflation to rise toward the Fed’s goal as oil prices stabilize.
Mester said she expects unemployment at the end of next year to fall to 5.5 percent, which she called the long-run level.
“As the expansion continues, you get the 3 percent growth that I’m expecting, we have the unemployment rate continue to come down, we will see wages start to accelerate,” she said.
Mester, 56, became president of the bank in June after almost three decades at the Philadelphia Fed, where she was research director since 2000.
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