On the eve of stepping down, Mester urges the Federal Reserve to provide clearer explanations of its decisions

According to the financial news app Zhitong Finance, Loretta Mester, President of the Federal Reserve Bank of Cleveland, stated that officials can help the public better understand their policy-making methods by talking more about what they would do if their forecasts did not materialize. Mester will step down at the end of this month.

Mester said, "I have always advocated explaining the reasons for our policy decisions, that is, 'Well, this is our interpretation of the current data, this is the economic outlook we believe in.' However, doing so carries risks, as there may be other scenarios in the economic outlook, which means policies X, Y, Z."

Mester stated that helping the public understand how officials will respond to different economic outcomes is crucial for managing expectations and minimizing volatility during uncertain times. This may be especially important now, as the Federal Reserve is preparing to start lowering benchmark interest rates after raising them to the highest level in 20 years last year.

In recent years, Mester has outlined similar communication strategies, including suggesting in a speech last month that longer statements be issued after policy meetings. Mester noted that this document has been shortened by about 60% over the past 10 years.

She mentioned that while brevity is a good thing, it is particularly challenging for policymakers to consider making any changes due to the limited word count, as every word is carefully scrutinized by the market.

She also proposed modifying the format of the closely watched Federal Reserve quarterly forecasts to link policymakers' rate outlook with their respective forecasts for inflation, growth, and unemployment.

After serving at the Federal Reserve Bank of Philadelphia for 30 years, Mester took on the role of President of the Federal Reserve Bank of Cleveland. Over the years, Mester has gradually become one of the most outspoken hawks in the Federal Reserve.

Shortly after becoming a policymaker in 2014, Mester began calling for rate hikes at the Federal Reserve, as she was concerned that keeping borrowing costs near zero since the 2008 financial crisis could encourage excessive risk-taking, leading to financial stability risks.

Opposing Votes

These concerns partly stemmed from her years of research in finance and banking, leading her to cast dissenting votes at critical moments - such as supporting rate hikes at the September and November 2016 meetings when the Federal Reserve kept rates unchanged.

At the onset of the outbreak in March 2020, with businesses around the world closing and people staying at home, Federal Reserve policymakers took emergency action to lower borrowing costs to the lowest levels, with Mester being the only dissenting policymaker at the time.

In a statement explaining her reasons, Mester expressed concerns that the Fed's rate moves would not have much impact in unstable markets. She supported the Fed injecting significant liquidity into the financial system to support market operations.

Mester stated that although the Fed did not raise rates as quickly as she had hoped after the pandemic, the signal of an impending rate hike led to financial conditions tightening before the first rate hike in March 2022.

Mester said, "So, in that sense, we took action earlier." In the financial markets, "we actually started to see rates rise in December." Loretta Mester is the third female president of the Cleveland Fed, following Sandra Pianalto, who served as chair from 2003 to 2014, and Karen Horn, who served as chair from 1982 to 1987. Goldman Sachs veteran Beth Hammack will take office in August, becoming the fourth female president in the history of the regional Fed.

Mester stated that since joining the Federal Reserve, she has worked with four different Fed chairs, each with a different communication style, but they all share the common trait of encouraging colleagues to share their views.

She said: "The greatness of this institution is that not only do they tolerate different views, but they actually want you to have your own opinion on things."