With the economy progressing, not is the time to "reformulate" the Federal Open Market Committee's forward guidance, Federal Reserve Bank of Cleveland President and CEO Loretta J. Mester said Thursday.
"My preference is for forward guidance to convey that changes in the stance of policy will be calibrated 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 told an audience in Pittsburgh, according to prepared text released by the Fed.
Forward guidance had been altered "several" times, linking the liftoff "to a calendar date, to a numerical threshold for the unemployment rate, and, more recently, to qualitative information rather than to quantitative measures," she said.
Using a calendar date, may "sound best," Mester said, "at this point would be poor communication." Monetary policy "is dynamic and based on the economic outlook." Guidance must allow for conditions that "evolve differently than anticipated."
"I believe striving for clearer communication will yield benefits, especially as we undertake normalization. As normalization nears and progresses, there is likely to be increased volatility in financial markets; that is not necessarily a bad thing. Indeed, the goal of communication is not to reduce all volatility - volatility is a necessary part of price discovery in financial markets," she said. "But the better we can communicate our monetary policy framework and the basis for policy decisions, the more likely we can avoid undesirable disruptions and turbulence that could result from misunderstandings as we prepare for and progress on the journey to a more normal policymaking framework and policy stance."
She pointed to the improvement in unemployment over the past year, which has been better than expected. "A faster pace of progress toward our goals would argue for a faster return to normal, while a more subdued pace would argue for a slower return."
Recovery, she said, "has been a slow and difficult," and is not complete. Labor market improvement has been steady. Mester said she prefers to look at trends rather than individual monthly data. The rise in non-farm payrolls this year average 230,000 jobs a month, an increase from last year, and growth has been above 200,000 for each of the past six months. "While the recovery in jobs has been much slower than anyone would have liked, as of this May, the economy finally met the milestone of having added more jobs during the expansion than the 8.7 million jobs lost during the Great Recession."
As for the jobless rate, the 6.2% level in last month's employment report is lower than FOMC participants projected last September, when they estimated an unemployment rate of 6.4% to 6.8% in the fourth quarter of 2014. "Yet the labor market's journey is not yet complete - more progress needs to be made," Mester said.
By the end of 2015, Mester projected, the unemployment rate should drop near 5.5%, which she considers the "natural rate," or longer-run rate.
Economic growth was slowed by inclement weather last winter, and Mester expects GDP to rise at a 3% annual pace through the end of 2015.
Inflation has been advancing, rising to 1.6% this year from 1.2% last year. "My forecast is that inflation will move back toward 2 percent over time."
