Too much flexibility could risk efficacy of Fed policy -Plosser

Fri Feb 28, 2014 1:30pm EST

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Feb 28 (Reuters) - The Federal Reserve must revamp its guidance to markets on how long it plans to keep interest rates near zero because its current low-rate vow is no longer relevant, a top Fed official said on Friday.

And when it remakes its forward guidance, Philadelphia Federal Reserve Bank President Charles Plosser said, the central bank must take care to convince markets that it is serious about whatever promises it makes, or risk those policies becoming ineffective.

"Policymakers cannot maintain discretion and simultaneously commit to forward guidance and expect that guidance to be effective," Plosser told a New York conference put on by the University of Chicago's Booth School of Business.

The Fed has promised to keep interest rates near zero until well past the time that the unemployment rate reaches 6.5 percent. With the U.S. jobless rate now at 6.6 percent, that low-rate vow has become irrelevant, Plosser said.

Plosser, an avowed policy hawk who has opposed the Fed's super-easy monetary policies and votes on Fed policy this year, did not offer any specific formula for a new low-rate vow.

While the Fed could provide qualitative guidance on its future rate policy, Plosser said, it must have "some degree of commitment to abide" by its promises. Too much flexibility, in other words, could undermine the Fed's policies.

The Fed must also be clear about whether its guidance on low rates is simply meant to provide transparency about monetary policy, or if it is designed to provide an accommodative boost to the economy, he said.

If the latter, he said, the policy could backfire if the public interprets a vow to keep rates low for a long time as a prediction that the economy will stay weak.

Plosser has long been a proponent of rules-based monetary policy, an approach that has come under attack by some core members of the Fed's policy-setting panel.

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