Federal Reserve Bank of Cleveland President Loretta Mester recently emphasized the need for improved communication from the US central bank to better explain how economic conditions influence policy decisions. Speaking at a Bank of Japan conference in Tokyo on Tuesday, Mester proposed key changes to the Fed’s communication strategy.
Mester recommended that the Federal Reserve’s post-meeting policy statements should include more detailed descriptions of how officials assess economic developments and potential risks to the economic outlook. Additionally, she suggested that the quarterly summary of policymakers’ economic forecasts should provide greater detail.
“Enhancing our communications would make monetary policy more effective during normal times and improve the effectiveness of unconventional policy tools, such as forward guidance, during extraordinary times,” Mester said in her prepared remarks.
As a voting member of the Fed’s policy-setting committee this year, Mester highlighted that these communication improvements could be considered as part of the Fed’s five-year policy framework review, which is expected to begin towards the end of 2024.
She noted that the current trend towards shorter policy statements, while often praised for simplicity, can lead to misinterpretation as each word gains significant weight. Mester argued that more comprehensive statements would help the public better understand the link between economic conditions and policy decisions.
“It would be beneficial for policymakers to take control of the narrative,” Mester said. “Using more words to describe how economic developments affect the outlook and outlining potential risks would provide market participants and the general public with a clearer understanding of the contingent, data-dependent nature of policymaking. This would enhance the central bank’s credibility, making policy changes appear less like breaches of promise.”
Mester also suggested that scenario analysis should become a standard part of Fed communications. This involves describing how different economic scenarios would lead to various policy actions, which could be particularly useful in periods of economic uncertainty.
Another recommendation from Mester was to publish an anonymized matrix that connects officials’ interest rate forecasts—commonly known as the “dot plot”—with their projections for growth, unemployment, and inflation. “Currently, the variables in the SEP are not linked across participants, and the median paths provided don’t necessarily represent a coherent forecast,” she noted. This approach would provide the public with a clearer understanding of how each Fed official would adjust policy based on evolving economic conditions.
This sentiment was echoed by Chicago Fed President Austan Goolsbee in May, who also advocated for more detailed communication of individual policymakers’ perspectives.
Mester, who will step down from her role as Cleveland Fed president in June, emphasized that improving communication strategies is crucial for the credibility and effectiveness of the Federal Reserve’s monetary policy.
Leave feedback about this