Fed's Plosser urges setting clear rules for policy-making

NEW YORK Thu May 8, 2014 8:00am EDT

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NEW YORK May 8 (Reuters) - The Federal Reserve should adopt a more systematic approach to policy-making, a top Fed official said on Thursday, repeating his call for less discretion and more clearly articulated rules for decisions such as when to raise interest rates.

Charles Plosser, president of the Philadelphia Fed and a voter on U.S. monetary policy this year, suggested that a reasonable place to start would be an existing economic model housed at the central bank known as FRB/US.

Moving to "rule-based behavior" would reduce uncertainty over Fed policy in financial markets and clarify matters for the public, said Plosser, whose hawkish views often run against the thinking of Chair Janet Yellen and the Fed's core policymakers.

"Systematic policies that provide important information about the policymakers' reaction function combined with other information, such as the policymakers' economic forecasts, can sharpen forward guidance in a way that reduces policy uncertainty and enhances economic performance," Plosser said in prepared remarks for delivery to the Council on Foreign Relations.

Plosser gave a similar speech in March. On Thursday he did not comment on when he expects rates to rise, and he did not discuss economic conditions.

While the U.S. central bank has used "forward guidance" since the 2008 financial crisis to telegraph how long it planned to keep rates near zero, it has always retained latitude on policy.

The Fed's latest statement lists a variety of broad factors it is monitoring -- including inflation, the labor market and financial developments -- as it determines when to finally raise rates after more than five years near zero. In an example of the discretion it employs, the Fed says it doesn't expect to raise rates for a "considerable time" after it stops buying bonds.

Fed economists have used the FRB/US model since 1996 to run simulations of the performance of the economy under a range of assumptions on everything from inflation to rates to growth.

(Reporting by Jonathan Spicer and Richard Leong; Editing by Leslie Adler)

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