The forward guidance issued by the Federal Reserve should gradually evolve back to its “normal” role of communicating the thinking behind policy moves, Cleveland Fed President Loretta Mester told a bankers’ conference in Paris on Monday.
“While explicit forward guidance was used as a policy tool during the recession and earlier in the recovery, in more normal times, away from the zero lower bound, I believe forward guidance should be viewed more as a communications device,” she said, according to a text of her speech.
“As such, I would like to see the forward guidance evolve over time to give more information about the conditions we systematically assess in calibrating the stance of policy to the economy’s actual progress and anticipated progress toward our dual-mandate goals,” she added.
In a section of the speech titled “Moving from Extraordinary Back to Ordinary”, Mester said the Fed’s balance sheet would in the long run return to a more normal size and composition by reducing security holdings “in a gradual and predictable way”.
“At this point, the FOMC doesn’t anticipate selling the agency mortgage-backed securities on its balance sheet as part of the normalization process, although it might engage in limited sales in the longer run to reduce or eliminate residual holdings,” she said of the Fed’s policy body, the Federal Open Market Committee.
