Prospect of Fed pulling too far back on communications poses volatility risk, Musalem says
TLT•St. Louis Fed President Alberto Musalem said a sharp reduction in central bank communications could raise interest rates and inflation if households and businesses are left to guess how the Fed will respond to economic developments.
1. Musalem warns of risks
Musalem said the Fed should not make specific promises about interest rates, but should provide a framework explaining how it will respond as the economy evolves. Without an explanation of its decisions, the public may face more uncertainty, potentially leading to higher borrowing costs and inflationary or deflationary spirals, he said.
2. Fed reviews communications
Fed Chair Kevin Warsh has formed a task force to recommend changes to the central bank’s communications, which he has described as too freewheeling. Musalem said a predictable, explained framework supports the Fed’s democratic accountability.
