January 17, 2018 / 9:46 PM / a month ago

Fed's Mester says fiscal policy assumption may be 'too low'

NEW YORK (Reuters) - Cleveland Fed President Loretta Mester said on Wednesday that her assumption the U.S. federal tax overhaul would add 0.25 to 0.5 percentage points in growth over the next two years might be too low.

Mester, speaking to reporters after a speech at Rutgers University in New Jersey, said that with respect to growth and inflation, risks are still balanced, but there are “salient” upside risks now after several years.

“My fiscal policy assumption is it’ll add a quarter to a half percentage point in growth over the next two years and perhaps that’s a little bit too low,” she said.

Still, Mester said she has not changed her long-run growth forecast of 2 percent.

During her prepared speech, Mester outlined ways that the U.S. central bank could improve its communications with the public, adding that clear communication plays a vital role in monetary policymaking.

Mester, who votes on the Fed’s monetary policy committee this year under a rotation, said clear communication can make monetary policy more effective by helping households and businesses make better economic decisions. She also said, in a prepared text of the speech, that the Fed has made “substantial” progress in that regard.

To strengthen communication, Mester suggested that the Federal Open Market Committee’s (FOMC) post-meeting statements should focus less on short-term changes in the data released between the committee’s meetings. Instead, the statements should concentrate on the accumulated changes in economic and financial conditions and their effect on the medium-run outlook, she said.

Mester also said the FOMC should use “simple” monetary policy rules as benchmarks to explain policy decisions.

“I am not advocating setting policy mechanically according to a simple policy rule; no rule works well enough across a variety of economic models and circumstances,” she said.

“However, using the rules as reference points and discussing why our policy may differ from these policy descriptions could go some way in helping to explain our own policy reaction function to the public.”

Mester added that another way to improve communication would be to link variables in the FOMC’s Summary of Economic Projections.

Mester’s speech comes on the same day that the Fed said in its Beige Book report the U.S. economy and inflation expanded at a modest-to-moderate pace from late November through the end of 2017, while wages continued to push higher.

Mester told reporters after her speech that businesses have been telling the Fed for “quite a while” that they are seeing tightness in the labor market, resulting in increased wages and other benefits.

“I would characterize those reports as being widerspread than they were before and over a widespread of occupations,” Mester said.

Reporting by Stephanie Kelly; editing by Diane Craft

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