The US central bank faced challenges in communicating its ultra-easy monetary policy when short-term interest rates were close to zero, President of the U.S. Federal Reserve Bank of Boston Eric Rosengren said Friday.
It was "certainly more challenging" for the Fed to alter its monetary policy, Rosengren said at the Council on Foreign Relations in New York, talking about the partial government shutdown that has lasted for 11 days and disrupted the schedule of economic data release.
The ultra-easy monetray policy tools that the Fed use now are a little bit new, and "the public at large is not used to the kinds of communication that goes around those tools, I think that has presented a particular challenge," he added.
Moreover, the Fed doesn't have much historical data with the tools it is using now. The Fed is not alone in using these tools, "but nonetheless I think there is a great deal of uncertainty about how the communication can actually work exactly," he said.
Rosengren noted that central bank communication could be a powerful tool, but also "an imprecise and unpredictable instrument in terms of its impact on long-term rates."
He said the reaction to the discussion of a possible reduction in asset purchases appeared to have had an outsized impact on long-term rates, with long-term rates still about 100 basis points higher than they were at the beginning of May.
"A data-driven policy that also considers the risks to our forecasts can be difficult to communicate," he said.
Rosengren said he didn't think there would be an easy answer to a more clear and concise monetary policy communication, because easy answers would frequently lead to the wrong policy. "So we should start with what is the right policy, and then communicate it as best as we can," he said.
The most important thing the Fed can and should communicate is that "the policies we are setting are consistent with our goals-our mandate-for maximum employment and price stability," he noted.
Talking about how Fed Vice Chairwoman Janet Yellen, who has been nominated by President Barack Obama as the next Fed chief, would be a communicator to the market, Rosengren said Yellen would be "very good at speaking very precisely, very clearly and very calmly."