Cleveland Fed President Loretta Mester said on Tuesday that the Federal Reserve's policy statement should include a longer passage than it currently does to describe its assessment of economic developments, how these affect the central bank's outlook, and the risks to that outlook.
In a speech prepared for a Bank of Japan conference in Tokyo, Mester noted that while brevity is often seen as a virtue, it can also be a drawback because policy-making must be done in a world filled with uncertainties, where the economy is constantly being hit by shocks that can lead to conditions different from expectations. "In a brief statement, every word takes on magnified importance," she said.
Under Chair Jerome Powell, the Fed’s policy statements have become shorter. Mester, who plans to retire next month, said this isn't always the best choice. She cited the Eagles' 1970s hit song "Hotel California," stating that short statements have a "Hotel California" problem: we are reluctant to change certain words because doing so might send different signals. "Words 'check in' but are hard to 'check out,' even if it would be desirable," she said.
Mester believes policymakers should exercise control over the narrative by using more words to describe the current assessment of economic developments, how they affect the outlook, and the risks to that outlook.
Another way to improve Fed communication is to introduce an "anonymous matrix" with economic and policy projections, to be released alongside the quarterly Summary of Economic Projections (SEP). The most notable feature of the SEP is the display of policymakers' range and clustered "dot plots" for appropriate interest rate levels.
By releasing such a matrix, market participants could see the link between each participant's outlook and their views on appropriate monetary policy. Mester noted that currently, the SEP variables are not linked among participants, and the median paths provided do not necessarily represent coherent forecasts. For example, the person predicting the median inflation path is not necessarily the one predicting the median output path.
Mester's suggestions—what she calls "using your words" and "connecting the dots"—come ahead of Powell's planned review of the monetary policy framework. Powell has said that this review will begin later this year and may extend into 2025. Mester expects the Fed will consider its communication strategy during this review.
