PHILADELPHIA, Fri May 25, 2012 – The debate over how the Federal Reserve can best articulate its policy actions grew on Friday as a top Fed official warned against discretionary decisions, and asked whether a more systematic approach was desirable.
Philadelphia Fed President Charles Plosser said the financial crisis has tied the hands of many central banks, including the Fed, creating a “conundrum” of near-zero interest rates and a search for new and untested ways to boost economies.
“The degree to which policy actions, for better or worse, have become increasingly discretionary should give us pause as we try to evaluate policy choices…” Plosser said in prepared remarks to the Deutsche Bundesbank Spring Conference.
“Whether to act as the lender of last resort is discretionary, but does it have to be so? Are there ways to make it more systematic ex ante?” he asked attendees.
Plosser, a policy hawk who sits on a Fed subcommittee looking at ways to improve communications, did not comment on specific policy actions.
Besides taking unprecedented steps to help bail out hobbled U.S. banks and to battle the recession in recent years, the Fed has also taken steps to boost transparency, including adopting a 2-percent inflation target in January.
In recent days, several Fed officials have debated what more, if anything, can be done sharpen the central bank’s communication on the possible future course of monetary policy. More clarity could help individuals, businesses and investors anticipate changes in rates, for example, helping policymakers get results in the economy.
New York Fed President William Dudley, on Thursday, was the latest to weigh in on whether a more systematic or “rules-based” approach to policy-setting was appropriate, dissecting the so-called Taylor Rule and concluding that consideration of alternative policy plans and sober judgment cannot be replaced.
“While simple policy rules provide useful information to policymakers, their very virtue – simplicity – means they cannot capture all information that is relevant for policymaking,” Dudley said in New York.