As you can probably tell from our initiative to end too big to fail (TBTF), I am not shy about speaking my mind and advocating for policies I believe are in the best interest of the country. But I give careful consideration to whether drawing attention to an issue is the best way to positively influence that issue. In the case of TBTF, I believe we need to have a serious national conversation about whether we have done enough to address large bank failures. This is why we are having public symposiums to raise awareness and educate the American people while we educate ourselves.

But not every issue will be advanced by drawing more attention to it, and this is why I have been more hesitant to speak out about monetary policy, even though I do have views about the right course of action. I think market participants are too focused on the Fed, and I am reluctant to draw even more attention to short-term monetary policy decisions, when attention should be focused on solutions to longer-term issues.

There’s been a long time disconnect and I have been worried. I’ve said so on Bloomberg many times, that I’m worried that that gets reconciled in some kind of violent way where there’s a lot of turmoil caused in markets because of changing expectations of what the Fed is going to do.

So I think the Committee gives its best assessment in that dot plot of what they think is going to happen and — and where they think the policy rate is going to go. It’s not clear to me why the pricing should be very different from that, unless markets have a much more pessimistic view of the U.S. economy, which is certainly something you could — you could have.

But if you look at the forecasts in the private sector of how the economy is going to evolve, those aren’t, you know, materially different from what the Fed thinks.

So — so I’m not quite sure why — why we need to have this — this, you know, constant sort of disconnect.

In terms of transparency, I do think it is a fair critique that, in the past, the Federal Reserve has not always been sufficiently transparent... During the crisis, I also believe we could have done more to explain the motivations for our extraordinary interventions. At times, while the motivations and objectives might have been obvious to us, they weren’t always as readily apparent to Congress or to the public. I think this created uncertainty about what we were trying to accomplish, and made it more difficult for outside observers to assess the appropriateness of our actions and our motives.

In my remarks today, I will explain why the Committee anticipates that only gradual increases in the federal funds rate are likely to be warranted in coming years, emphasizing that this guidance should be understood as a forecast for the trajectory of policy rates that the Committee anticipates will prove to be appropriate to achieve its objectives, conditional on the outlook for real economic activity and inflation. Importantly, this forecast is not a plan set in stone that will be carried out regardless of economic developments.

Financial market participants appear to recognize the FOMC's data-dependent approach because incoming data surprises typically induce changes in market expectations about the likely future path of policy, resulting in movements in bond yields that act to buffer the economy from shocks. This mechanism serves as an important "automatic stabilizer" for the economy. As I have already noted, the decline in market expectations since December for the future path of the federal funds rate and accompanying downward pressure on long-term interest rates have helped to offset the contractionary effects of somewhat less favorable financial conditions and slower foreign growth. In addition, the public's expectation that the Fed will respond to economic disturbances in a predictable manner to reduce or offset their potential harmful effects means that the public is apt to react less adversely to such shocks--a response which serves to stabilize the expectations underpinning hiring and spending decisions.

Such a stabilizing effect is one consequence of effective communication by the FOMC about its outlook for the economy and how, based on that outlook, policy is expected to evolve to achieve our economic objectives. I continue to strongly believe that monetary policy is most effective when the FOMC is forthcoming in addressing economic and financial developments such as those I have discussed in these remarks, and when we speak clearly about how such developments may affect the outlook and the expected path of policy. I have done my best to do so today, in the time you have kindly granted me.

Financial market participants appear to recognize the FOMC's data-dependent approach because incoming data surprises typically induce changes in market expectations about the likely future path of policy, resulting in movements in bond yields that act to buffer the economy from shocks. This mechanism serves as an important "automatic stabilizer" for the economy. As I have already noted, the decline in market expectations since December for the future path of the federal funds rate and accompanying downward pressure on long-term interest rates have helped to offset the contractionary effects of somewhat less favorable financial conditions and slower foreign growth. In addition, the public's expectation that the Fed will respond to economic disturbances in a predictable manner to reduce or offset their potential harmful effects means that the public is apt to react less adversely to such shocks--a response which serves to stabilize the expectations underpinning hiring and spending decisions

“You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April,” Bullard said in a Bloomberg interview in New York Wednesday, in which he criticized the Fed’s practice of publishing officials’ projections on the path of interest rates. “I think we are going to end up overshooting on inflation” and the natural rate of unemployment, he said.
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“We’re in reasonably good shape” with regard to monetary policy but “the odds that we will fall somewhat behind the curve have increased modestly,” Bullard said. “We are going to get some overshooting here in the relatively near term” on unemployment “that might cause the committee to have to raise rates more rapidly later on.”

Bullard said there was a “credible case” to be made to move in March. “We didn’t do it -- so now we can look at April and see what the data looks like when we get to April,” he said.

The Federal Open Market Committee kept interest rates unchanged last week and halved projections for how many times it would hike this year from four times in December after volatility in financial markets and weakening global growth clouded the U.S. economic outlook. Bullard argued that the forecasts, also referred to as the dot plot, contribute to uncertainty in financial markets.

“You really saw that over the first part of this year,” Bullard said, adding that he’s getting “increasingly concerned” about giving forward guidance through those projections. “I’ve even thought about dropping out unilaterally from the whole exercise.”
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“I am not revealing my dot,” Bullard said. “I want to get out of the game of how many rate increases this year.”

I am not revealing my dot. I want to get out of the game of how many rate increases this year.

“It’s really hurting us that we’ve got this kind of alternate meeting thing,” Bullard said. “I think we should make all meetings ex-ante identical. You should have press conferences at every meeting. I’ve long been an advocate of this.”

So the advice to potential policymakers is simple: Learn as much as you can, for most of it will come in useful at some stage of your career; but never forget that identifying what is happening in the economy is essential to your ability to do your job, and for that you need to keep your eyes, your ears, and your mind open, and with regard to your mouth--to use it with caution.

Interest-rate forecasts the U.S. Federal Open Market Committee is set to publish after its March meeting could differ “slightly” from those issued at the end of last year, according to Federal Reserve Bank of San Francisco President John Williams.

There “could be a tweak here or there” in projections known as the dot plot, Williams told reporters Wednesday in San Ramon, California.

The Federal Open Market Committee unusually decided not to offer a statement of how the risks balanced out in January, and Mr. Williams argued that may in any case be “a better place to be” than trying to issue one-sentence statement on risks. The Fed, he said, should not load too much into its post-meeting statements.

Any discussion about the costs and benefits of forward guidance must take place in the context of the situation in which it is being used. This brings me to my first case study, the Fed’s use of explicit time-based guidance starting on August 9, 2011. Despite extraordinary monetary stimulus—over 2½ years of near-zero short-term interest rates and QE1 and QE2—the unemployment rate had come down only 1 percentage point from its recession peak, to 9 percent, and the economic recovery remained tepid. Given the weakness in the economy, the FOMC repeatedly stated that it intended to keep rates exceptionally low “for an extended period.” Nonetheless, public expectations were glued to the idea that the Fed would start to raise rates in about a year.

It was against that backdrop that the FOMC decided to take dramatic action to shift public expectations using time-based forward guidance. The August 2011 FOMC statement said “The Committee currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” Three comments are in order. First, this statement, as well as subsequent FOMC statements that used forward guidance, clearly put the economic outlook front and center as the determinant of policy. The outlook defines the guidance. Second, it was the lower bound that tied the hands of policymakers, not the introduction of date-based guidance. Third, this action was taken after weighing the concerns around the costs of time-based guidance discussed in Feroli et al. (2016); the conclusion then was that the benefits from stimulating the economy outweighed the potential cost.

The evidence bears out this judgment. The issuance of the statement dramatically shifted public expectations of future Fed policy. This is seen in private economists’ forecasts of the length of time until the Fed would raise rates, which jumped following the statement. Compared to the gentle taps of the hammer of previous FOMC verbal guidance that appeared to have little effect on expectations, the time-based guidance was like a sledgehammer.

Although time-based guidance can create communications challenges, I see other factors as having been more important in recent years. In particular, the challenge of deciding when and how to use unconventional tools--and ultimately when and how to reduce that usage--is a great one. The task of communicating clearly about those decisions is equally great. And the reality of the FOMC's size and diversity, not to mention uncertainty about the evolving structure of the economy and the effects of monetary policy actions, means that we are still far from the ideal world of a fully worked out, clearly specified and transparent consensus on what economists call a "reaction function"--a complete description of how policy will respond to changes in economic conditions.

I spend a lot of time talking about being data dependent. I literally made T-shirts that say, “Monetary policy: It’s data dependent.” But there’s some confusion, because a lot of people take this to mean that I’m just waiting for the next employment or inflation report. This is what happens when a Fed official tries to substitute economistese with real English. What I actually mean is that being driven by the data is about having a policymaking strategy. It’s about implementing consistent and predictable behavior that is driven by the economy’s performance relative to our goals.