May 13 (Reuters) - Federal Reserve Vice-chair Phillip Jefferson said Monday that in an otherwise healthy economy the central bank should hold steady on monetary policy until it's clear inflation is again moderating back to the 2% target.
The Fed is looking for evidence price pressures are retreating after a swift decline in price pressures last year ran into setbacks over the start of this year, the official said. And until that data arrives "I think it is appropriate to keep the policy rate in restrictive territory," Jefferson said at a conference on central bank communications held by the Federal Reserve Bank of Cleveland.
The economy is "in a solid position in terms of jobs are still being created, growth is still occurring," Jefferson said. But at the same time, "the decline in inflation has attenuated in the first quarter of this year and that, for me, is a source of concern."
The Fed's second-in-command noted that the generally healthy state of the economy allows him to focus on the work that needs to be done to lower price pressures.
Jefferson’s remarks Monday were his first since the central bank’s most recent gathering of the Federal Open Market Committee. On May 1 that body held the central bank’s interest rate target steady, as expected, while central bankers continue to search for evidence that the sticky inflation pressures seen over the start of the year are again waning. The Fed’s overnight rate target has been fixed at between 5.25% and 5.5% since last July.
Fed officials still generally believe that they’ll be able to cut interest rates as long as inflation pressures again start to weaken toward the 2% target. But some officials have over recent days questioned monetary policy is set at a restrictive enough level to get inflation back toward the target, although these officials have stopped short of saying the Fed needs to raise interest rates again.
CLEAR COMMUNICATIONS
The bulk of Jefferson's remarks were devoted to evolutions in Fed communications, which have largely been positive, albeit with some challenges.
“It’s widely accepted” that clear communications enhance how effective central bank policies are because they "can affect the expected path of interest rates and financial conditions more generally,” Jefferson said, while adding sometimes attempts to communicate can have “unintended consequences.”
“There is always a risk” that officials’ comments about the future of the economy and monetary policy are “interpreted by the public with a false sense of certainty” that can be mistaken for a fixed view on the outlook, Jefferson said.
“When that interpretation is proven wrong down the road, it can create more volatility and uncertainty than if there had been no announcement,” Jefferson said.
The public comments of officials can also muddy the waters, he said. “The diversity of viewpoints among policymakers lends itself to stimulating debates and, ultimately, better policy,” Jefferson said, adding “but in such a situation, more communication could increase rather than reduce uncertainty about our policies.”
Jefferson’s take on central bank communications arrives as central bankers have long faced challenges over their quarterly economic projections and the steady din of officials' public remarks.
The quarterly Fed projections -- the next set will come at the June meeting -- are not an official forecast but merely a summation of the views of policy makers. However, many in markets do see them as a house view, and Fed officials are routinely asked to comment on those forecasts.
At the same time, Fed officials are frequent public speakers, and those speaking opportunities, which on some days can see multiple policy makers opining on the outlook, can leave market participants struggling to find a coherent take on what central bankers believe lies ahead.
A report last week from the Brookings Institution's Hutchins Center on Fiscal and Monetary Policy found academics and Fed watchers giving decent marks to the Fed for clear communications, although some aspects of that outreach, like the quarterly forecasts, were viewed with a more mixed take.
Reporting by Michael S. Derby; Editing by Chizu Nomiyama
