MNI POLICY: Fed Monetary Policy Formula Said More Effective

By Brooke Migdon

     WASHINGTON (MNI) - The Federal Reserve should adopt a clear monetary policy

rule outlining how interest rates will be adjusted depending on how the economy

performs, boosting transparency and dispelling any doubts over possible

political interference, according to research to be presented at the Jackson

Hole Economic Symposium on Friday.

     The rule could be periodically evaluated and modified when necessary to

ensure it keeps pace with understanding of the economy, MIT economist and former

governor of the Central Bank of Cyprus Athanasios Orphanides wrote in the paper,

in which he acknowledged the Fed's effective policy response to the 2008 crisis

but argued that its difficult experiences with the zero lower bound of monetary

policy call for further modifications to its framework.

     The FOMC's Summary of Economic Projections could be expanded to a quarterly

monetary policy report outlining Committee members' individual economic

projections, including more than one plausible scenario, Orphanides said, with a

clear indication of how interest rates could respond in the different

circumstances.

     "Monetary policy is most effective when it is formulated in a systematic

manner, following a clearly communicated monetary policy rule," he wrote,

calling language such as the Fed's current promise to "act as appropriate"

overly ambiguous.

     "Even with the best intentions, discretionary policy worsens policy

trade-offs and yields inferior economic performance over time," he added.

"Discretion may invite perceptions of political interference that damage the

credibility of the central bank and threaten its independence."

     His recommendations follow the first Fed interest rate cut since 2008 in

July amid increasing economic uncertainty and open pressure from President

Donald Trump for further monetary easing.

--MNI Washington Bureau; +1 202 371 2121; email: brooke.migdon@marketnews.com

[TOPICS: MMUFE$,M$U$$$,MT$$$$]