Mester says the Fed should better explain its members’ forecasts

The president of the Bank of the Federal Reserve from Cleveland, Loretta Mestersaid the US central bank should study ways to better communicate to the public how economic conditions will affect future policy decisions.

In a speech Tuesday in Tokyo, Mester recommended two key changes: adding more words to the Fed’s post-meeting monetary policy statement – ​​to describe how officials assess economic developments and potential risks to the outlook – and detail its quarterly summary of central bankers’ 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.” he said in prepared remarks at a conference hosted by the Bank of Japan.

The Cleveland Fed chief, who votes on the policy-setting committee this year, said she hopes officials will consider the communications as part of the five-year review of its policy framework that will begin in late 2024. She had no comment. about the outlook for the economy or interest rates.

Master He said increasingly brief monetary policy statements, while often seen as a virtue, can also be problematic, as each word takes on added meaning. They can also make it difficult for the public to see the relationship between economic developments and monetary policy decisions.

He stated that it would be better than the central bankers “take control of the narrative” and use more words to describe how economic events have affected the outlook and the potential risks to those outlook.

Put more emphasis on risks “would give market participants and the general public a better idea of ​​the contingent and data-dependent nature of policymaking and would increase the central bank’s credibility in the sense that a policy change would be seen less as a default. of promise“, held.

Master He also noted that scenario analysis — or describing how different scenarios would lead to different policy actions — should also be a standard part of Fed communications.

“This could be particularly useful in periods such as the current one, when the underlying structural elements of the economy may have changed.“, said.

The Fed should also consider publishing an anonymous matrix connecting officials’ forecasts for interest rates (often calleddot diagram” with its growth, unemployment and inflation projections in its Summary of Economic Projections, Mester added.

Connecting the dots would give the public a better idea of ​​how each individual official would adjust policy based on changing economic conditions, Mester said, reiterating an argument she made in 2018.

The president of the Fed of Chicago, Austan Goolsbee, also made a similar argument this month at an event at Stanford University’s Hoover Institute.

Master will step down as president of the Fed of Cleveland in June, when his term expires.

Balance

On the same panel, the governor of the Fed Michelle Bowman focused her prepared remarks on the central bank’s balance sheet, the reduction of which “has developed relatively smoothly“, said.

Fed members will slow the pace at which they are reducing the balance sheet starting next month, and have said they intend to stop when the level of bank reserves is somewhat above a level they consider ample.

“In my opinion, we are not there yet.Bowman said, adding that he would have supported waiting to slow the pace of asset liquidations or implementing a more gradual slowdown.

“In my opinion, it is important to continue reducing the size of the balance sheet to achieve ample reserves as soon as possible and while the economy remains strong“, 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.”.