charles i plosser : communication challenges speech by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, before the 2014 us monetary policy forum – “ initiative on global markets ”, at the university of chicago booth school of business, new york city, 28 february 2014. * * * the views expressed are my own and not necessarily those of the federal reserve system or the fomc. highlights • president plosser believes the federal open market committee has to revamp its current forward guidance regarding the future federal funds rate path because the 6. 5 percent unemployment threshold has become irrelevant. • president plosser points out that before offering new forward guidance, the fomc ought to be clear about its purpose. is it purely a transparency device, or is it a way to commit to a more accommodative future policy stance to add more accommodation today? • president plosser notes that commitment is required to be successful in either approach to forward guidance. policymakers cannot maintain discretion and simultaneously commit to forward guidance and expect that guidance to be effective. introduction it is a pleasure to return to this event. the organizers have put together another great and timely program with distinguished participants. however, with governor stein and presidents kocherlakota, evans, and myself all here, i am beginning to wonder if we are in washington rather than in new york. nevertheless, it is great to be on the program with so many of my fellow policymakers. if you listen carefully to each of us, you will understand why i start with the usual caveat that my remarks represent my own views and not necessarily those of the federal reserve system or my colleagues on the federal open market committee ( fomc ). communication and transparency have been important themes in monetary policy discussions over the past decade or more. indeed, in 2007 this monetary policy forum began with alan blinder ’ s keynote address titled “ making monetary policy and talking about it. ” in part, this emphasis on communication and transparency reflects the steady evolution in the theory and science of monetary policy. reflecting this emerging consensus, the federal reserve during the tenure of chairman bernanke has taken a number of actions to promote increased transparency about its actions and policies. in fact, president evans and i served on a subcommittee led by current chair yellen specifically focused on improving communication. our efforts to improve communication took on heightened importance as the fomc responded to the financial crisis and recession. since december 2008

this year. if the economy continues to improve, we could find ourselves still trying to increase accommodation in an environment when history suggests that policy should perhaps be moving in the opposite direction. communication about the future path of asset purchases has, at times, been imprecise and confusing. last june, the committee suggested that it might begin to reduce the pace of purchases in the fall and perhaps end them when the unemployment rate reached 7 percent. however, the committee did not even begin the tapering process until unemployment had reached 7 percent. it now seems unlikely that the program will end until the unemployment rate is below – or as indicated in the fomc statement, perhaps “ well below ” – 6. 5 percent. why is the 6. 5 percent unemployment rate important? because the committee made it important. the committee, in essence, told the markets that the 6. 5 percent unemployment rate was an important quantitative marker. in december 2012, the fomc indicated that it intended to keep the federal funds rate target near zero at least as long as the unemployment rate was above 6. 5 percent, the inflation rate between one and two years ahead was projected to be no more than 2. 5 percent, and inflation expectations remained well anchored. however, it is important to remember that these guideposts were thresholds, not triggers. the fomc had not made a commitment to act once a threshold was reached, nor did it indicate how policy would evolve after a threshold was reached. it simply signaled that it would not act prior to crossing one of the thresholds. yet, the 6. 5 percent threshold will soon become irrelevant, and it probably is already. so the committee, at a minimum, has to revamp its communications regarding the future federal funds rate path. given that we are still easing policy by buying assets, it is pretty clear that even though the threshold will soon come and go, the committee is unlikely to contemplate raising rates as long as it is buying assets. put another way, the practical constraint at this point for raising the policy rate is no longer the unemployment rate but the fact that we are still buying assets. indeed, the committee has acknowledged that it will likely be appropriate to keep rates at their current low rates well past the time unemployment falls below bis central bankers ’ speeches 6. 5 percent. therefore, in my view, the threshold has already lost its meaning as a guidepost. it needs to be replaced with something that is more relevant and informative