WASHINGTON — St. Louis Federal Reserve Bank President James Bullard Monday spoke out in favor of the central bank releasing a quarterly report that incorporates official's economic outlooks in the context of the risks facing the economy, arguing that it would better inform the public as to the economy's likely direction.
Writing in the St. Louis Fed's April publication of "The Regional Economist," Bullard said a quarterly monetary policy report "could potentially provide a more complete discussion of the state of the U.S. economy and the likely direction going forward."
While not a voter on the policy-setting Federal Open Market Committee this year, Bullard has served as an important bellwether of coming policy changes in the past.
He added that the report could also include a discussion of the risks facing the economy and the possible impact of special situations — natural disasters for example.
The Fed already releases the economic forecasts of the Fed Board Governors and the 12 regional Fed presidents — as well as their expectations for the likely path of the federal funds rate — four times a year in its Summary of Economic Projections.
Bullard said the new report should be forward-looking and contain these forecasts, with its release coordinated with Fed Chairman Ben Bernanke's news conferences.
Bullard believes that under the current approach, with forecasts from the 19 FOMC participants, "there are potentially 19 different sets of forecasts based on 19 different models and 19 different policy assumptions."
The report, on the other hand, should be able to provide insight into the amount of uncertainty surrounding U.S. economic performance.
Right now, "too much emphasis tends to be placed on specific values for the forecasts and not enough on the notion that we do not really know how the economy will evolve," he said, arguing that the Fed should follow The Bank of England's practice of including probabilities of a wide range of outcomes.
The forecast that serves as the baseline Fed view in the new quarterly report could be constructed by staff at the Fed Board, crafted under the guidance of Bernanke, he continued.
"Given that the chairman typically stays in the middle of the Committee, the natural outcome would be a forecast that is not too different from the central tendency of the FOMC," Bullard said.
Bullard went on to say that his preference would be for the forecast to incorporate the market's expectation of future policy — "on both the interest-rate side and the balance-sheet side" — at the time the forecast is made.
"By using the market's expectation rather than the Committee's, the FOMC participants would avoid potentially giving the appearance of committing to a specific path for policy and would be able to adjust future policy as they deem necessary," Bullard said. "Using the market's expectation would also put the forecast on the same basis as private sector forecasts."
Under Bullard's proposal, FOMC participants would have the opportunity to provide their own forecast separately, with an explanation of how their view differs from the baseline Fed view.
"For instance, a participant's forecast for GDP may be higher, or his or her assessment of a certain risk may not be as large. Thus, the policy debate would not go away; it would simply revolve around the baseline," Bullard said.
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