Federal Reserve Bank of Cleveland President Loretta Mester said forward guidance should be more of a “communications device” that signals how policy will respond to changes in economic conditions.
“I would like to see the forward guidance evolve over time to give more information about the conditions we systematically assess in calibrating the stance of policy to the economy’s actual progress and anticipated progress toward our dual-mandate goals, and to the speed with which that progress is being achieved,” Mester said in a speech prepared for delivery in Cleveland.
She repeated her view that the Fed’s existing pledge to keep interest rates low for a “considerable time” after asset purchases end should be “reformulated.”
The central bank’s quarterly forecasts for the path of interest rates and the outlook for the economy, known as the Summary of Economic Projections, would be a better way to “convey information about the anticipated timing of liftoff.”
Monetary policy should respond to changes in the “realized and anticipated course of the economy,” said Mester, who votes on policy this year and is working on a review of communication policies.
Fed officials last week affirmed they are on pace to end a two-year asset purchase program next month and retained the “considerable time” language, even as they said bond purchases are set to end after their October meeting.
While the FOMC has said policy depends on how the economy evolves, the “considerable time” language focuses attention on a “calendar-time for liftoff rather than on the changes in economic conditions that will help determine changes in appropriate policy,” Mester said.
Monthly employment growth has averaged 215,000 this year, putting the U.S. on pace to add 2.58 million jobs in 2014 for the biggest annual gain in 15 years. The jobless rate fell to 6.1 percent in August, matching the lowest reading since September 2008.
In addition, U.S. growth rebounded to 4.2 percent in the second quarter after posting a 2.1 percent contraction in the first quarter that was the sharpest since the recession.
Mester, 55, became president of the Cleveland Fed in June after almost three decades at the Philadelphia Fed.
She is a member of Fed Vice Chairman Stanley Fischer’s communications subcommittee. Mester said Sept. 4 in her first speech as president that the Fed must “reformulate” its forward guidance on the future path of monetary policy to make it more data-dependent.
Mester voted in favor of Federal Open Market Committee statements at her first three meetings in June, July and September. Philadelphia’s Charles Plosser and Richard Fisher of Dallas dissented this month. The next meeting is Oct. 28-29.
The Cleveland district covers Ohio, western Pennsylvania, eastern Kentucky, and part of northern West Virginia. The reserve bank is the supervisor of banks including PNC Financial Services Group Inc. in Pittsburgh and KeyCorp in Cleveland.
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