Adjusting the perceived neutral rate of monetary policy need to be considered only "with great care and discipline," Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said Thursday.
"Monetary policy is not an appropriate tool for addressing perceived declines in productivity," Plosser said according to prepared text of a speech released by the Fed. "However, assessments of long-run potential growth can influence the setting of monetary policy because they influence the steady-state or long-run real interest rate. If steady-state real rates are lower, then the so-called 'neutral setting of monetary policy' would also be lower. That is, the neutral funds rate would be lower."
While determining a neutral rate "may be relevant," Plosser said, the challenge is determining and communication such a value. "Measuring longer-run trends is a difficult and delicate issue," he said. "Because expectations about monetary policy are important, particularly in financial markets, it may be useful for the FOMC to indicate what ranges are likely for the neutral federal funds rate. But given the uncertainties, this may be difficult and conveying a false sense of precision may prove to be counterproductive."
As a result, any changes "to the perceived neutral funds rate should be done with great care and discipline," not to respond to "the typical cyclical fluctuations in real rates."
Further, Plosser expects "human ingenuity and innovation will continue to be a source of productivity growth. But that does not mean we should be complacent about our future. Productivity is the ultimate means to economic prosperity and we should undertake policies that promote innovation and technological progress and eliminate practices that discourage such progress."
Monetary policy's role, he said, is to promote a stable environment that allows success.
