charles i plosser : systematic policy and forward guidance remarks by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, at the money marketeers of new york university, inc., down town association, new york, 25 march 2014. * * * the views expressed are my own and not necessarily those of the federal reserve system or the fomc. highlights • president plosser highlights the relationship between systematic monetary policy and forward guidance. his goal is to help underscore how a systematic approach to monetary policy can improve the effectiveness of monetary policy in both normal times and in more unusual or extreme circumstances, such as when policy is constrained by the zero lower bound on nominal interest rates. • president plosser ’ s preference for dealing with forward guidance is for the fomc to articulate a reaction function as best it can. this entails describing a systematic approach to policymaking, where policy decisions are based on available information in a consistent and predictable way. • president plosser believes the most recent fomc statement took a step in this direction when it moved to a qualitative form of forward guidance by stating that the committee will be assessing progress – both realized and expected – toward its policy objectives. introduction i want to thank william kanto and the money marketeers for inviting me to speak again this evening. your series of guest speakers over the years has been quite illustrious, and it has included many federal reserve governors and presidents, not to mention distinguished economists and a wide array of others. so, before i share some thoughts on monetary policy with you tonight, i will begin with the usual disclaimer that my views are my own and do not necessarily reflect those of the federal reserve system or my colleagues on the federal open market committee ( fomc ). of course, that disclaimer is a two - way street, and you should not necessarily associate the views of my colleagues with my views. i believe that this diversity of views among fomc participants does more than assure variety among your guest speakers. it is one of the great strengths of our decentralized central bank. open dialogue and diversity of views leads to better policy decisions and is the primary means by which new ideas are gradually incorporated into our monetary policy framework. thus, i believe diversity of thought is a sign of thoughtful progress. as i noted in 2009 when i last spoke to you, the famous american journalist walter lippmann once said,

“ where all men think alike, no one thinks very much. ” tonight i would like to focus on a particular aspect of current monetary policy that has been a source of much discussion and debate – forward guidance – that is, the practice of providing information on the way monetary policy is likely to evolve in the future. forward guidance has taken on greater significance since the fomc lowered the target federal funds rate to essentially zero more than five years ago. facing this zero lower bound constraint on its primary policy instrument, the fomc has been attempting to implement monetary policy, in part, by influencing expectations of future policy. the logic for this approach derives from the important role expectations play in shaping economic outcomes. if monetary policy can affect those expectations in specific ways, it can influence current economic conditions. bis central bankers ’ speeches the approach i want to take in my discussion is to highlight the relationship between such forward guidance and systematic monetary policy. by systematic, i mean setting policy in a rule - like or largely predictable manner in response to changes in economic conditions. forward guidance and systematic monetary policy are closely related. understanding this relationship can provide insights into effective monetary policy in both normal times and in more unusual or extreme circumstances, such as when policy is constrained by the zero lower bound on nominal interest rates. so, i will begin with a brief review of the benefits of systematic policy. i will highlight why i think most academic economists have concluded that conducting monetary policy in a rulelike manner is preferable to regimes that are more discretionary. systematic policy for someone my age, it doesn ’ t seem all that long ago when it was taken for granted that central banking was supposed to be mysterious and secretive – the less said about monetary policy the better. indeed, it wasn ’ t until 1994 that the fomc began to publicly announce the policy changes made at an fomc meeting. up until then, the markets were left to infer the policy action from the fed ’ s behavior in the market. 1 but times have most definitely changed. transparency has replaced secrecy, and open communications have replaced mystery. while there are those who long for those thrilling days of yesteryear when central bankers said little and communicated even less, i don ’ t think we can turn back the clock – nor should we. economic science has come a long way in the past 30 years, and one of the most important developments has been the recognition of the important role that expectations play in understanding economic outcomes. this is particularly evident