By Steven K. Beckner

Plosser and Atlanta Fed President Dennis Lockhart told MNI they
favor a change in the forward guidance to make it less date-contingent
and more data contingent.

But Plosser said changing the forward guidance should not be seen
as an easing ploy. Rather than just announcing some level of
unemployment and/or inflation at which the Fed would stop holding the
funds rate near zero, he favors a more symmetrical and “systematic,”
“rule-based” framework that gives guidance as to how the Fed will adjust
interest rates on an on-going basis in response to the evolution in
economic conditions.

For instance, Plosser would favor communicating to markets and the
public that the Fed will raise rates based perhaps on how unemployment,
GDP growth, inflation or inflation expectations, move within some
rule-based framework — possibly a kind of “Taylor Rule.”

So, for example, if and when the unemployment falls by a certain
amount relative to the Fed’s longer-term projection and/or when the
inflation rate rises above the Fed’s long-term, implicit target the Fed
would raise the funds rate.

But Plosser said, “I don’t think the trigger strategy of just using
two points on a Phillips Curve is a particularly useful way of describing
our behavior. I think there are better ways to do that.”

Using forward guidance as a substitute for other kinds of easing
would be “backwards,” Plosser said. “If someone were to say that ‘I
already believe that I want to keep rates lower longer, and I just have
to figure out a way to convince people that’s what I want to do
… that’s the wrong way to conduct policy.”

Whatever the motivation, the FOMC seems headed toward some sort of
“trigger” system, despite Bernanke’s comment in June that it would be
“impossible” for FOMC members to agree on a set of indicators.

But a consensus may still be hard to reach. Kocherlakota said he
“would be surprised” if it is announced on Nov. 2 when the FOMC releases
its new policy statement and Bernanke gives his quarterly press
conference.

Bernanke may have to settle for outlining the conditions under
which he would seek further monetary stimulus with reference to the new
GDP, unemployment and inflation forecasts that will have been compiled
by the FOMC.

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** Market News International **

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