With uncertainty about the tools used to measure the economy, Federal Reserve Board Vice Chair for Supervision Randal Quarles said Thursday, it is important to map out a monetary policy strategy and stick to it.
“I think this situation reinforces and supports the importance of a clear, steady strategy and a gradual, predictable approach to the removal of accommodation as we continue to monitor the data,” Quarles told the Economic Club of New York, according to prepared text released by the Fed.
Among the factors with higher levels of uncertainty, he noted, “measures of labor slack, the relation between labor slack and inflation, the sensitivity of current inflation measures to actual resource constraints, and the future growth of productivity.”
While critics charge the uncertainty leaves policymakers with no clear guide, Quarles said, he disagrees.
Using an aviation analogy, Quarles said, “Precisely because of the uncertainty around the course inputs, the right strategy was to set a course based on your knowledge of the destination, winds, and performance of your plane; communicate that course clearly to air traffic control so everyone knew what you were doing; and then stick to that course steadily even as the course needle might waver from side to side across your instrument.”
If the course needle veered to one side and remained there, a correction was appropriate, with clear communication.
“Today uncertainty around many of the macroeconomic inputs to monetary policy decisions argues for just the same approach to navigation,” he said. “Rather than meaning that policy will drift because of this uncertainty, it means that policymakers should chart a course that is stable, gradual, and predictable; communicate it clearly; and then follow that course through the temporarily shifting and sometimes conflicting signs from the economy unless some strong and steady signal requires a firm but moderate correction. Given that the economy has performed fundamentally as I expected at the outset of this year, the right strategy is to maintain the gradual course that I have thought appropriate for some time now. Put another way, while I think that there is enough reason to think that the productive capacity of our economy might be increasing so that we should not feel compelled to accelerate our pace, I also think there is enough doubt about current inflation as an infallibly reliable measure of current resource constraints that the continued gradual removal of accommodation is appropriate.”
The economy is in “good spot,” he said, with the Fed’s dual mandate — maximum sustainable employment and price stability — nearly met.
