St. Louis Fed President Says Reduced Fed Communication Would Raise Uncertainty, Could Push Up Inflation
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St. Louis Fed President Musalem said on the 29th that if the Federal Reserve significantly scales back its dialogue with markets, households and businesses would be forced to guess at the Fed's response, potentially leading to higher interest rates and inflation as well as greater volatility. Speaking at an event at the London School of Economics, Musalem said the central bank does not need to make specific commitments about the policy rate, but added that "we must avoid abandoning communication altogether," saying it should at least provide a framework that lets households and businesses understand how the central bank will respond to changes in the economy. Fed Chair Warsh, who took office in May, has said that quieter and more purposeful external communication by the Fed leads to better monetary policy, and has set up a special team to make recommendations on how the Fed communicates. Musalem said of this, "If the central bank does not explain how and why it makes policy decisions, the public has no choice but to speculate about policy decisions," pointing out that this would increase uncertainty and ultimately lead to higher funding costs for businesses and households, as well as a greater risk of falling into an inflation or deflation spiral.