Mester urges Fed to be clearer about its decisions and policies

The Federal Reserve has transformed the way it communicates with the public in recent decades and Loretta Mester has had a front row seat. He has attended more than 200 central bank monetary policy meetings USAfirst as a staff member and, since 2014, as a policymaker at the table.

Now, on the eve of his retirement, he says the Fed can do even better.

The outgoing Cleveland Fed chair, who will step down at the end of the month after four decades at the central bank, told Bloomberg News that officials can help the public better understand her approach to policymaking by talking more about what they would do if their forecasts did not come true.

“I’ve always been a fan of trying to explain the rationale for our policy decisions, that is, ‘OK, here’s how we read the current data, here’s where we think the economy is going.’”Mester said in a June 14 interview. “However, there are risks around that, and there may be other scenarios for where the economy is headed and that means for X, Y, Z policies.”.

Helping the public understand how central bankers would respond to different economic outcomes is critical to managing expectations and minimizing volatility in times of uncertainty, he said. Master. It could be especially important as they prepare to start reducing their benchmark rate after raising it to a two-decade high last year.

Mester has outlined a communications strategy along these lines in recent years, including last month in a speech in which he recommended issuing longer statements after monetary policy meetings. The document has shrunk by about 60% in the last decade, she noted.

While it’s good to be concise, the more limited number of words makes considering any changes especially challenging for policymakers because every word is scrutinized by markets, he said.

He also proposed reviewing the format of the quarterly projections of the Fed to link the rate outlooks of each of the central bankers with their respective inflation, growth and unemployment forecasts.

Mester, who assumed the presidency of the Cleveland Fed After three decades at the Philadelphia Fed, he developed a reputation over the years as one of the most outspoken and hawkish members of the central bank.

Shortly after beginning to participate in the design of monetary policy in 2014, Master began calling on the Fed to raise interest rates out of fear that the near-zero borrowing costs that still existed since the 2008 financial crisis could encourage excessive risk-taking, creating risks to financial stability.

Dissenting votes

Those concerns, shaped in part by her years of research on finance and banking, led her to vote against her peers at key moments, such as when she dissented in favor of rate increases in September and November 2016, meetings in which The Fed left rates unchanged.

Mester also issued a lone dissent at the start of the pandemic, when authorities took emergency measures in March 2020 to reduce borrowing costs to rock-bottom levels as businesses around the world closed and people sheltered in their homes.

In a statement explaining his reasoning, Mester said he was concerned that the Fed’s rate cut would not have as much impact at a time when markets were unstable. He supported the central bank’s efforts to flood the financial system with liquidity to support market functioning.

While the central bank also did not raise rates as quickly after the pandemic as it would have liked, its message that higher rates were coming led to tighter financial conditions before the first increase in March 2022, Mester said.

“So in that sense, I guess you could say we acted early.”said Master. In the financial markets, “In fact, we started to see rates tighten in December.”

Master She became the third woman to lead the Cleveland Fedafter its predecessor, Sandra Pianaltowho was president from 2003 to 2014, and Karen Hornwho held the position from 1982 to 1987. The former Goldman Sachs Group Inc executive Beth Hammack She will become the fourth woman to head the regional Fed bank when she takes office in August.

Master He said the four Fed chairs he has worked with since joining the central bank had different communication styles, but their common denominator is that they all encouraged their peers to share their views.

“The good thing about the institution is that not only do they tolerate different points of view, but you are actually expected to have your own views on things.“, said.