By Brai Odion-Esene

WASHINGTON (MNI) – Philadelphia Federal Reserve Bank President
Charles Plosser said Friday he is committed to increasing the clarity of
the Fed’s public communications about current economic conditions, the
economic outlook, and its policymaking framework, saying steps taken by
the central bank so far are a work in progress.

“We can and should improve our discussion of the economy and our
approach to policy through the publication of a more comprehensive
monetary policy report to the public. We can also better define our
reaction function, to enable the public to better understand and
anticipate future policy actions,” Plosser writes in the Philadelphia
Fed’s annual report published Friday.

“Economic research has shown that increased transparency can
improve the effectiveness of monetary policy, as well as the Fed’s
accountability with the public. But the benefit depends on the public’s
understanding of the policymaking framework,” he added.

Plosser also stresses the importance of finding ways to ensure the
Fed preserves its independence and that “the boundaries between monetary
and fiscal policy are restored.”

On the increased transparency front, Plosser — who sits on the
Fed’s communication committee — focuses on two steps he has mentioned
in the past as ways for the central bank to improve public understanding
of policy.

The first is for the Fed to publish a more comprehensive monetary
policy report four times a year. Currently, Fed Chair Ben Bernanke
testifies before Congress on monetary policy on a semi-annual basis, and
submits a written report.

Bernanke also now holds separate press briefings four times a year
to summarize the economic projections of the Federal Open Market
Committee, while the subsequent minutes of the FOMC meeting provide
additional information on policymakers’ views on the economy.

“I think there is an opportunity to combine these efforts to create
a more comprehensive report on monetary policy,” Plosser said.

“I think the Fed should consider producing a similar report to
elaborate and reinforce its policy framework and how it relates to
economic conditions. These reports will help improve the public’s
understanding of policy, which will help make policy more effective and
the central bank more accountable,” he argues.

Plosser also pushes, once again, for the FOMC — which is the Fed’s
policymaking body — to adopt clearer guidelines on how policy evolves
with economic conditions.

“The better the public and the markets understand how policy is
likely to be adjusted as the economy changes, the more predictable
policy becomes, which promotes price stability and better economic
outcomes,” he said.

“The history of U.S. monetary policy is filled with stops and
starts and changes in direction, yet the Fed has communicated little
about what drives those decisions,” Plosser adds.

So the Fed should provide more clarity regarding its “reaction
function,” — the factors that will influence their policy decisions —
he said.

“The practice of using systematic rules as guides to monetary
policy imposes an important discipline on policymaking and improves
communication and transparency. This is because systematic rules make
policy more predictable and therefore help the public and markets make
better decisions,” Plosser said.

And as an added benefit, “systematic policy also reduces the
temptation to engage in discretionary policies,” he continues.

Plosser acknowledges however, that the FOMC “is still some way”
from agreeing on one systematic policy rule or reaction function, adding
that such choices will involve “elaborate discussions and agreement on
the appropriate class of models and an agreed-upon loss function.”

Plosser also expresses concern over how the combination of a
financial crisis and sustained fiscal imbalances has led to a breakdown
in the accepted barriers between monetary and fiscal policy.

“It is simply good governance to keep a healthy degree of
separation between those responsible for tax and spending policies and
those responsible for monetary creation,” Plosser said. “We need to
restore the boundaries.”

** MNI Washington Bureau: 202-371-2121 **

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