NEW YORK – The Federal Open Market Committee should stress the uncertainty of future economic paths and describe how policy will react in possible situations, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Wednesday.
“Too often, our communications about the future course of the economy imply considerably more certainty than we can possible have,” he told a group in Rapid City, S.D., according to prepared text of his remarks, released by the Fed. “We should be more transparent about the uncertainties that we face as policymakers. We can and should use scenario analyses to describe how our policy will respond to new information about those uncertainties.”
Kocherlakota’s remarks were similar to his speech on May 9, when he discussed improvements on FOMC communication, detailing how the framework statement the Fed first released in January “details the common principles regarding goals and strategy that shape FOMC decision-making.”
The statement, he added, “outlines the strategy that the FOMC follows in order to implement the FOMC’s dual mandate.”
While the framework defines price stability, through a 2.0% target for inflation, it doesn’t define maximum employment. He noted, the FOMC “faces an especially large amount of uncertainty about the level of maximum employment that it can hope to achieve.”
Nonmonetary factors are a greater influence on employment than monetary policy. The factors fluctuate. “Their changes in turn generate fluctuations in the level of maximum employment achievable through monetary policy—fluctuations that are often hard to gauge on a real-time basis,” Kocherlakota said.
Two views prevail about the deterioration in the labor markets. Some say the trend is reversible and some say it will remain. “These two possibilities suggest that the FOMC is confronted with an unusually high degree of uncertainty about the level of ‘maximum employment’ it can achieve,” Kocherlakota said. “This uncertainty translates directly into a corresponding uncertainty about the appropriate approach to policy. In particular, policymakers who see the deterioration in labor market performance as reversible using monetary policy will typically favor more accommodative policy than those who view the deterioration as more protracted.
“Fortunately, we can use other sources of information to reduce the level of uncertainty about the maximum level of employment achievable through monetary policy. ‘Maximum employment’ for monetary policy is widely interpreted as the level of employment that is sustainable through monetary policy actions without an acceleration in inflation. While we cannot directly observe ‘maximum employment,’ we do observe inflation, and its behavior is a useful signal of how close we are to the maximum level of employment achievable by the FOMC,” he said.