With a dual mandate of price stability and maximum employment, the Federal Reserve has discretion to switch between goals, but Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser believes the Fed should focus on price stability.
"In my view, this dual mandate has contributed to a view that monetary policy can accomplish far more than perhaps it is capable of achieving," Plosser told the Greater Philadelphia Chamber of Commerce, according to prepared text released by the Fed.
The dual mandate "opened the door to highly discretionary policies, which can be justified by shifting the focus or rationale for action from goal to goal," he said.
Monetary policy is limited in its "ability to influence real variables, such as employment," Plosser said, but price stability can be achieved. "Setting clear, achievable objectives is the first part of the framework. Asking policymakers to pursue those objectives in a systematic, rule-like approach is the second key principle," he said.
"Rules," Plosser noted, "work better than discretion because they are transparent and therefore allow for simpler and more effective communication of policy decisions." But, he did say rules can be broken. "I don't believe that we need to follow rules mechanically. Judgment will always be required."
The economy is recovering and "has returned to a more normal footing, and as such, I believe that monetary policy should follow suit," Plosser said.
Plosser said the Fed should clearly articulate objectives, and pursue those "objectives in a systematic, rule-like manner and help the public understand how policy will react systematically to changes in economic conditions."
He also suggested a detailed monetary policy report to communicate and improve transparency and predictability.
"Equally important in my view is that greater clarity about policymakers' reaction function strengthens accountability. So, systematic policy, communicated transparently, strengthens accountability and credibility and, thus, serves to preserve the central bank's independence," he said.
