Mester Calls for More Clarity on How Fed Assesses Goals Progress

(Bloomberg) -- The Federal Reserve has room to clarify and better outline the new metrics it’s using for some of its policy decisions, Cleveland Fed President Loretta Mester said.

Mester detailed the Fed’s new policy framework, adopted last year, and pointed to areas where the central bank could better explain how its assessing progress on its inflation and employment goals in prepared remarks for a virtual event on Friday hosted by the Bank of Finland and the Centre for Economic Policy Research.

“Given that we have a new strategy and that we continue to live with the uncertainties of the pandemic, giving the public the information it needs to better understand how policy makers are likely to react not only to anticipated economic and financial developments but also to unanticipated developments seems like a very worthwhile endeavor,” Mester said.

Using inflation as an example, Mester said the Federal Open Market Committee’s April assessment that price surges due to supply-demand imbalances were likely to be “transitory” is no longer the best description of inflation dynamics in the economy. She said the price increases are likely to persist for longer than policy makers initially thought.

“My own modal forecast is for inflation to remain high this year and then to begin to move back down next year; however, I see upside risks to this forecast,” Mester said.

She also said the labor market has made “remarkable” progress since the depth of the pandemic in April of last year.

Under its new policy framework, the Fed now seeks inflation averaging 2% over time, from simply a 2% goal before, and defines maximum employment as a “broad-based and inclusive goal” that changes over time.

Mester said that providing further clarity on what time period policy makers are looking at when assessing whether inflation is close to the average 2% goal, and selecting a set group of indicators they look at when measuring employment, could provide Fed watchers and the public better forward guidance.

“A statement that offered more of an explanation of the FOMC’s views on the factors affecting current inflation readings, the outlook for inflation, and the risks around that outlook would give the public a better sense of the FOMC’s assessment than merely saying that elevated readings largely reflect transitory factors,” Mester said.

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