The Federal Open Market Committee must decide what the purpose of forward guidance is going to be, Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said Friday.
The 6.5% threshold for unemployment "will soon become irrelevant, and it probably is already," Plosser told a panel on communication strategy at the U.S. Monetary Policy Forum, according to prepared text of his remarks, released by the Fed. "So the Committee, at a minimum, has to revamp its communications regarding the future federal funds rate path. Given that we are still easing policy by buying assets, it is pretty clear that even though the threshold will soon come and go, the Committee is unlikely to contemplate raising rates as long as it is buying assets. Put another way, the practical constraint at this point for raising the policy rate is no longer the unemployment rate but the fact that we are still buying assets. Indeed, the Committee has acknowledged that it will likely be appropriate to keep rates at their current low rates well past the time unemployment falls below 6.5 percent. Therefore, in my view, the threshold has already lost its meaning as a guidepost. It needs to be replaced with something that is more relevant and informative."
With the 6.5% threshold nearly breached, plosser said, "This poses the challenge of how and what to communicate about policy going forward. Our actions and the data have made the current form of forward guidance outdated and mostly irrelevant. Indeed, one could reasonably wonder whether the inflation threshold has any meaning at this point. In other words, by allowing the unemployment threshold to pass without taking action, the public might conclude that the Committee could easily decide to let the inflation threshold pass without taking action as well."
Stressing that "it is important to be clear about what this forward guidance is intended to accomplish," Plosser said guidance could be "purely a transparency device" or "a way of increasing accommodation in a period when the policy rate is at or near the zero lower bound."
Whichever way the FOMC decides, Plosser said commitment is the key to success. "Policymakers cannot maintain discretion and simultaneously commit to forward guidance and expect that guidance to be effective."
