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Fed's Plosser Rips Central Bank's Forward Guidance Policy

NEW YORK (TheStreet) -- Philadelphia Fed President Charles Plosser on Friday ripped into the Federal Reserve's communication policy, arguing that the central bank's thresholds implemented for forward guidance have lost their meaning.

As part of its unprecedented monetary policy following the 2008 financial crisis, the Federal Open Market Committee told market participants that it would keep the federal funds rate at historically low levels near zero at least until the unemployment rate dipped below 6.5%.

Investors are pondering the Fed's next step as the unemployment rate sits at 6.6% and edges near that threshold, but Fed Chairwoman Janet Yellen repeated on Thursday in testimony to the Senate Banking Committee that the central bank would refrain from raising interest rates even as unemployment drops well below 6.5%. She even went as far as to say that Fed would consider changing these objectives.

It is this new wrinkle in monetary policy that triggered Plosser's comments Friday at the U.S. Monetary Policy Forum hosted annually by the Chicago Booth School of Business in New York.

"Given that we are still easing policy by buying assets, it is pretty clear that even though the threshold will soon come and go, the Committee is unlikely to contemplate raising rates as long as it is buying assets," Plosser said in prepared comments. "Therefore, in my view, the threshold has already lost its meaning as a guidepost."

Plosser made his comments on a panel with Chicago Fed President Charles Evans, who delivered less critical opinions of the Fed's communication.

Evans said in prepared remarks that the central bank's communication policy has evolved to reflect the unprecedented changes in monetary policy and the U.S. economy since 2009.

An example Evans mentioned was then-Chairman Ben Bernanke's April 2012 press conference during which reporters peppered the Fed chief with skepticism that the FOMC's economic projections indicated clear commitment to closing the unemployment gap within their timeframe.

"This public questioning was trying to assess whether these forecasts reflected a difference of opinion between the FOMC and the public," said Evans. "[T]he open public discussion of the issue enhanced the Fed's accountability regarding the bull's-eye scorecard."

Though contentious, Evans said, this made the entire discussion public and contemporaneously with the policy decision.

But Plosser's focus remained on the importance of the 6.5% unemployment threshold moving forward, and he wondered if the decision to keep rates low well past that point, or to shift the policy hurt the FOMC's credibility.

"Why is the 6.5% unemployment rate important? Because the committee made it important," Plosser said.

While the language differs between the two Fed presidents, they said they recognized that challenges remain for policymakers. And while Plosser may worry that the Fed's forward guidance could lose influence on the markets, Evans repeatedly noted the many changes the central bank has made in the aftermath of the financial crisis to better communicate with markets and the general public.

How the Fed will handle its unemployment rate and inflation targets, is yet to be communicated.

-- Written by Joe Deaux in New York.

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