Monetary policy would be more transparent and forward guidance would be boosted if the Federal Reserve gave more details about policy would move based on conditions, Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said Thursday.
"The appropriate way to make policy systematic, or rule-like, is to base policy decisions on the state of the economy," Plosser told the Council on Foreign Relations, according to prepared text released by the Fed. "That is, policymakers should describe the reaction function that determines how the current and future policy rate will be set depending on the state of the economy."
Although predicting the future is impossible, policymakers "therefore cannot realistically commit to particular future values of the policy rate. Nonetheless, describing a reaction function or rule that explains how the policy rate will be determined in the future as a function of economic conditions can be highly informative," he noted.
Monetary policy has not evolved to a point "where we can specify a rule for setting policy and turn decision-making over to a computer," he added. "Judgment is still required. Nevertheless, I place a great deal of importance on systematic behavior both as prescription for good policy and in terms of my own policy deliberations."
Plosser suggested using a Taylor-like rule, which "yield very good results in a variety of theoretical settings." He noted, the Federal Reserve Board staff's "seems like a reasonable place to start."
After agreeing to a model, Plosser said, "The FOMC could then articulate whether and why it anticipates policy to be somewhat more restrained or more accommodative relative to the projections given by the rules. A monetary policy report that might accompany such a forecast could include various views that may differ from the baseline summaries."
This would show the "inherent uncertainty that policymakers face, yet it would also provide a better sense of the likely direction of policy and the variables most related systematically to that policy. Further, this type of communication would push the FOMC to conduct policy in a more systematic manner, which I believe will lead to better economic outcomes over the longer run."
