Fed's Plosser floats new approach to forward guidance on rates

Credit: Reuters/Brendan McDermid

Philadelphia Federal Reserve President Charles Plosser speaks at the Council on Foreign Relations in New York, May 8, 2014.

'I favor clearer communication concerning the formulation of policy,' Philadelphia Fed President Charles Plosser said in remarks prepared for delivery to Stanford University's Hoover Institution.

Plosser, who has floated the idea before, said the Fed could include guidance on where rates should go, based on several different monetary policy rules, in its biannual monetary policy report. The Fed could then explain 'whether and why it anticipates policy to be somewhat more restrained or more accommodative relative to the projections given by the various rules.'

Doing so would force the Fed to explain its policies more clearly to the public, which should lead to better economic outcomes by reducing volatility in inflation and output, he said.

The Fed has been criticized for sending conflicting signals on rates. Each quarter, it publishes a matrix of 'dots,' each representing the forecast of a single, unnamed policymaker. When they were published in March, the dots suggested policymakers expected a slightly steeper path of rate rises than they had earlier.

But Fed Chair Janet Yellen, speaking shortly after the release of the matrix, told market participants not to pay too much attention to the dots but to instead rely on her guidance that rate rises will be gradual.

'Providing information about how the policy path is likely to evolve forces policymakers to think more deeply and more systematically about policy,' Plosser said.

Plosser said the Fed could use an economic model developed internally by the Fed, called FRB/US, as the basis for the forecasting process, but the central bank could also try other models.

(Reporting by Ann Saphir; Editing by Leslie Adler)

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