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Cleveland Fed's new chief calls for forward guidance change
September 4, 2014 / 4:38 PM / 3 years ago

Cleveland Fed's new chief calls for forward guidance change

Loretta Mester, President and CEO of the Federal Reserve Bank of Cleveland, walks with James McAndrews (L), vice president of the Federal Reserve Bank of New York, as they arrive for the opening reception of the Jackson Hole Economic Policy Symposium, in Jackson Hole, Wyoming August 21, 2014. REUTERS/David Stubbs

PITTSBURGH (Reuters) - The Federal Reserve needs to change its forward guidance on interest rates, a top official at the central bank said on Thursday, in order to better reflect the speed of the Fed’s progress toward its economic goals.

“I believe it is again time for the Committee to reformulate its forward guidance,” said Cleveland Fed President Loretta Mester, referring to the Federal Open Market Committee.

In her first speech since taking the helm at the Cleveland Fed in June, Mester said inflation signs are encouraging, and that the Fed should expect wages to rise with prices, rather than lead price gains.

Mester, a voting member of the Fed’s policy-setting committee this year, said the Fed needs to navigate back to more normal seas, though she added that the Fed’s large balance sheet will complicate normalization.

The Fed has said that it will keep rates at their current level for a “considerable time” after its asset purchase program ends. Mester said that guidance should change.

“I believe striving for clearer communication will yield benefits, especially as we undertake normalization,” said Mester, speaking here at a local business event.

The Fed has kept interest rates at near zero since December 2008 in response to the financial crisis that hit that year.

Mester became the Cleveland Fed president on June 1, leaving her job as head of research for the Philadelphia Reserve Bank.

In that role, she worked for Philadelphia Fed President Charles Plosser, who is known for his hawkish views on inflation, calling repeatedly for the Fed to put a faster end to its accommodative monetary policy.

Mester’s own monetary policy views are less clear, though her research work and former colleagues indicate she does not necessarily share the stance of her former boss.

Mester did not reveal much of her interest rate view on Thursday, saying only that the Fed will “eventually” be able to move away from its accommodative tools. She said she expects the central bank’s bond buying to end in the fall, echoing Fed statements that say it will wrap up in October.

“Yet, even with the end of the purchase program, the Fed’s balance sheet will remain very large, with assets of much longer maturity than usual, and this will complicate the normalization journey,” she said.

The Fed’s balance sheet has ballooned from around $1 trillion before the 2008 financial crisis to the current level of around $4.5 trillion.

Mester, who has spent 28 years at the Fed, said that she expects inflation to return to 2 percent over the next two years. In addition, Mester said that the Fed should expect wages to rise with prices, not before.

“It would not be prudent for policymakers to simply wait for wages to accelerate before assessing the implications of the stance of monetary policy for future price inflation,” Mester said, imploring policymakers to be forward looking.

Reporting by Michael Flaherty; Editing by Andrea Ricci

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