October 15, 2015 / 2:32 PM / 4 years ago

Fed's Dudley opposed to a rule-based approach to rate policy

WASHINGTON, Oct 15 (Reuters) - The Federal Reserve must be clear about its plans for interest rate policy but should not be slave to mathematical formulas, New York Federal Reserve President William Dudley said on Thursday.

For the Fed to effectively guide the economy, “households and businesses need to be able to anticipate how the Federal Reserve is likely to respond to evolving conditions,” Dudley said in prepared remarks for a panel in Washington.

Speaking alongside a top proponent of the idea that central banks should follow clear rules, Dudley said such rules were useful but they oversimplified how the economy really works.

A so-called Taylor rule, named after economist John Taylor, who was also on the panel, would not have led the U.S. central bank to cut rates as aggressively as it did at the outset of the 2007-2009 recession, Dudley said. That could have made the economic crisis worse, he added.

“Prescriptive rules will wind up being behind the curve,” said Dudley, who did not comment on the outlook for the economy or monetary policy.

Dudley’s remarks come at a time when many central bankers are unclear over how to interpret recent economic data, which has confounded some mathematical models that Fed officials use to gauge where the economy is going. Fed officials have issued very different interpretations of the data, raising uncertainty over when the central bank will raise rates.

The debate over the ideas of Taylor, who has advised Republican presidential candidate Jeb Bush on economic policy, is also playing out in Congress where some Republicans want to pass legislation to make the Fed follow specific rules when setting policy.

Fed Chair Janet Yellen and other Fed officials have criticized those calls as having the potential to tie the central bank’s hands during future economic crises. (Reporting by Jason Lange and Howard Schneider in Washington; Editing by Paul Simao)

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