Fed's Plosser: FOMC Should Ditch "Balance of Risks" Outlook

Includes: DIA, IEF, QQQ, SPY
by: SA Eli Hoffmann

Philly Fed President Charles Plosser said in a Wall Street Journal interview Monday the FOMC should reconsider its policy of assessing the balance of risks between growth and inflation in its statements. Plosser contends a clear-cut pronouncement as to whether weak growth or inflation is the Fed's primary concern "may convey too much confidence about where it thinks interest rates are headed." Markets tend to assume that if the Fed's focus is on inflation, it is inclined to raise rates; if it's on weak growth, it is inclined to cut rates; and that if the statement references "balanced risk," the Fed will likely keep rates steady. In late October, the Fed's statement spoke of balanced risk, yet governors were later forced to backtrack after ensuing credit market tightness undid much of the perceived healing that resulted from Fed cuts beginning in August.

WSJ editor and Fed-watcher Greg Ip says it's unclear how widely shared Plosser's views are. Recently, the FOMC overhauled its communication strategy, including more-frequent economic forecasts, but stopped short of changing the basic structure of its statements.

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