Philadelphia Federal Reserve Bank President Charles Plosser said Friday the U.S. central bank’s focus on its employment mandate could cost it credibility when it comes to achieving its longer-term price stability objective.
“In my view, excessive focus on short-run control of employment weakens the credibility and effectiveness of the Fed in achieving its price stability objective,” Plosser said in a speech prepared for delivery to the Society of American Business Editors and Writers fall conference in New York.
He also warned the Fed’s dual mandate of maximum employment and price stability “has contributed to a view that monetary policy can do accomplish far more than it is, perhaps, capable of achieving.”
Recent policy statements from the Federal Open Market Committee “have increasingly given the impression that it wants to achieve an employment goal as quickly as possible through aggressive monetary accommodation,” he said.
For example, after the September meeting, the FOMC’s statement said “a range of labor market indicators suggests that there remains significant underutilization of labor resources.”
Plosser, a voter on the FOMC this year, dissented from that statement, as well at the previous meeting.
“Since moderate long-term interest rates generally result when prices are stable, many have interpreted these goals as a dual mandate to manage fluctuations in employment in the short run while preserving price stability in the long run,” Plosser said Friday.
However, “most economists are dubious of the ability of monetary policy to predictably and precisely control employment in the short run,” he said, “and there is a strong consensus that monetary policy cannot determine employment in the long run.”
Because of this, Plosser said he has argued that “Congress ought to redefine the Fed’s monetary policy goals to focus solely, or at least primarily, on price stability.”
Monetary policy “has a very limited ability to influence real variables, such as employment,” and, “in a regime with fiat currency, only the central bank can ensure price stability.”
Plosser added that having the multiple objects “opens the door to highly discretionary policies, which can be justified by shifting the focus or rationale for action from goal to goal.”
Even with the current two objectives, Plosser made the case for “setting clear, achievable objectives,” and called, once again, for a systematic rule-like approach when setting monetary policy.
“I believe the FOMC should move forward to describe a reaction function and then communicate our actions and decisions in terms of this reaction function,” said Plosser, who has announced he will retire March 1, 2015.
Plosser also stressed his belief the committee’s forward guidance should be part of a “systematic approach to decision-making and not an independent policy tool that attempts to bend expectations.”
With the end of the Fed’s latest quantitative easing program and as it considers normalizing its policy rate, “we have the opportunity to ensure the public understands that forward guidance is an integrated part of a systematic approach to policy,” he said.
Plosser said the FOMC’s efforts to improve communication and transparency is “a journey” and the central bank has been making progress.
“Transparency not only improves the effectiveness of monetary policy, it also improves the central bank’s credibility and accountability with the public,” he planned to tell the group of business journalists.
Publishing guidelines on longer-run goals, policy strategy, and the assumptions included in the FOMC projections “are great strides toward this goal,” he said. “However, more can be done.”
One idea, which he has called for in the past, is “a detailed monetary policy report” issued quarterly, which could be a “useful vehicle for such enhanced communication.”