(Reuters) – Federal Reserve officials should be more transparent and release more information after monetary policy meetings to help shape market expectations, Cleveland Fed President Loretta Mester said on Friday.
Policymakers are placed in a difficult situation when there is a mismatch between what financial markets are expecting and what central bank officials have in mind, Mester said in remarks at the annual University of Chicago Booth School of Business forum on monetary policy.
Officials that use more accommodative policy than they feel is appropriate – with the purpose of meeting market expectations – can increase financial risks, Mester said. On the other hand, disappointing markets by not easing monetary policy could lead to increased volatility and tighter financial conditions.
“Even a policymaker who declares that surprising the markets won’t deter her from following appropriate policy might find that this declaration is not time consistent when faced with such a choice,” Mester said in prepared remarks.
One possible fix could be to provide more information in the statement the Federal Open Market Committee releases after meetings, Mester said. For example, officials could provide more details on what they view as risks and they could include graphs that are usually not released until three weeks later, along with the meeting minutes. Adding more details could also provide more clarity to the message intended by the currently brief post-meeting statement, which is closely analyzed by investors.
“If we used more words to explain things, each word would carry less weight,” Mester said. “The language would be less boilerplate. This would free us to explain our rationale and change the statement’s language productively from meeting to meeting without fear of sending the wrong message.”
Central bank officials are in the process of evaluating the tools they have to fight a downturn and assessing their ability to influence the global economy in an era of low interest rates. The use of “forward guidance” to inform markets is among the tools previously viewed as “unconventional,” which policymakers expect they may need to use in a future crisis.
A research paper released Friday at the conference argued that some of the policy approaches used to combat recent recessions, including bond buying and negative rates, could have had greater impact if they had been rolled out earlier and more aggressively.
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