NEW YORK, March 25 (Reuters) - The Federal Reserve should clearly articulate what would prompt it to tighten monetary policy after more than five years of near-zero interest rates, a top U.S. central banker said on Tuesday.
Philadelphia Fed President Charles Plosser, taking up a familiar theme, said in a speech that such a systematic set of rules would set out a “reaction function” that would help the public better understand when the U.S. central bank would raise rates.
Theoretically, such an approach would replace the more qualitative preference of Fed Chair Janet Yellen and most other Fed officials, who last week adjusted their policy statement to say that rates will likely stay low for a “considerable time” after the Fed wraps up its bond-buying stimulus program.
Plosser, who backed this policy shift, nonetheless said on Tuesday in remarks prepared for delivery to a bond-traders dinner that his preference for dealing with so-called forward guidance on rates is for the Fed’s policy-setting Federal Open Market Committee to “articulate a reaction function as best it can.”
“But even if the FOMC were not prepared to choose a particular rule, it could articulate more clearly a qualitative reaction function that would serve as a baseline for future changes in policy as we exit the zero lower bound,” he said.
“It is my belief that doing so would be a more understandable form of forward guidance, less subject to misinterpretation as policy transitions from unusual times to more normal times.”
Plosser, a policy hawk, noted that it would be difficult to reach such a consensus among the Fed’s 16 current policymakers. But he said that systematic rules could rely for example on economic indicators such as growth of U.S. output, changes in unemployment or employment growth.
As it stands, both Fed policymakers and Wall Street economists generally expect the first tightening to come around the second or third quarter of next year, as long as the U.S. economy continues to pick up steam.
Reporting by Jonathan Spicer; Editing by Leslie Adler