Papers Outline Increased Fed Focus on Global Factors and Communication

JACKSON HOLE, Wyo. -- Two papers presented at the Kansas City Fed's policy symposium on Friday offered recommendations for central bankers to improve policy-making during a period of increased economic uncertainty.

The first made the case for paying greater attention to global developments in setting policy, which can be a tricky task given how elected leaders could look askew at central bankers focusing on anything but short-run domestic considerations.

The paper, presented by Oscar Jordà of the San Francisco Fed and Alan Taylor of the University of California at Davis, argues that the so-called neutral rate of interest that neither spurs nor slows economic growth has a strong global component, which suggests potential limits to how far interest rates across countries can diverge without problems.

"Global forces set the course of interest rates over the medium to long run. This happens to a degree perhaps insufficiently appreciated," the authors wrote. "Navigating policy through the economy's stormy waters therefore requires a good reading of local currents as much as underlying yet powerful global disturbances."

In a world of global financial markets, where capital can easily move across borders, central banks must set policy in response to domestic conditions without ignoring global trends, which "risks provoking internal and external imbalances, as well as unwanted dislocation in credit markets, eventually carrying the economy off course," they conclude.

The second paper made a series of proposals to improve how the Federal Reserve communicates its policy-making process to markets and the public.

Athanasios Orphanides, a professor at the Massachusetts Institute of Technology and former governor of the Central Bank of Cyprus, concludes many of the Fed's increased efforts to improve communications over the past two decades have served the institution well.

The Fed in 1994 began releasing policy statements announcing changes in its benchmark interest rate. And the 2008 financial crisis greatly increased the amount of information the central bank provides to the public.

Mr. Orphanides said the quarterly summary of economic projections from Fed officials and its accompanying interest- rate projections, sometimes referred to as a "dot plot," would be more valuable if it expressed changes in officials' uncertainty or confidence in their projections.

Officials pencil in the interest rate projection consistent with their modal, or most likely, path for the economy. But the uncertainty around these forecasts can't be seen, meaning the projections provide "more information about disagreement regarding modal projections," said Mr. Orphanides.

While the dot plot is informative about the diversity of opinion over the most likely economic path, it doesn't offer insight into the uncertainty of these projections or how this uncertainty might change over time, he wrote.

One possible approach, he said, would be to release additional projections in which Fed officials specify how they see the economy performing and policy responding under two or more alternative risk scenarios.

Write to Nick Timiraos at nick.timiraos@wsj.com


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  08-23-19 1309ET
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