(Bloomberg Business) — Monetary policy makers in the U.S. face some tough choices over the next few weeks as they consider the implications of slower Chinese growth that has convulsed financial markets. Investors are wondering how the Federal Open Market Committee is weighing options.
Committee Vice Chairman and New York Fed President William C. Dudley shared his view Wednesday, saying a September interest-rate increase was "less compelling to me than it was a few weeks ago."
Still, Dudley didn't rule out a September rate hike and said it will depend on how the U.S. economy performs and where financial markets settle. It's a confusing time for policy makers and investors.
In such periods of high uncertainty, more frequent and detailed communication is what's needed, said Laura Rosner, U.S. economist at BNP Paribas in New York who previously worked at the New York Fed.
"The outlook is evolving, and so what are the risks to policy tightening right now?" she said.
Here are three suggestions from former Fed staff members on how the FOMC could improve communication:
More frequent press conferences
If the Fed doesn't raise interest rates in September, Chair Janet Yellen could offer to hold a press conference following every FOMC meeting for the next six months, instead of after every other meeting as is current Fed practice. At the moment, September and December's FOMC meetings have press conferences while October does not.
Increasing their frequency would bring the Fed into line with the practice of the European Central Bank and Bank of Japan, as well as Norway's Norges Bank and Sweden's Riksbank. St. Louis Fed President James Bullard has publicly called for press conferences after every FOMC meeting and International Monetary Fund Managing Director Christine Lagarde has made the same recommendation.
Pros:
The public would have a fresh view of how the FOMC sees the world between the quarterly meetings. An October press conference would also underscore Yellen's oft-repeated message that all meetings should be considered "live" for policy action. She said in March that when the Fed does start raising rates it would be appropriate to explain the move in detail, and the Fed could arrange a conference call with reporters to answer questions if the decision falls on an FOMC that isn't already scheduled with a regular press conference.
"There is an argument to be made for having press conferences at every meeting," said Michael Hanson, senior U.S. economist at Bank of America in New York, who worked at the Fed Board's Division of Monetary Affairs in Washington.
Cons:
It would create expectations for a press conference after every meeting on a permanent basis. While this might be worth doing, it would create more work for Yellen and the Fed staff.
Policy scenarios for investors
Simulations are easy for Fed staffers to do thanks to computer modeling. They could run a series of charts showing a sharp slowdown in China's growth rate alongside their best estimates of what that would mean for U.S. growth, employment and inflation.
FOMC members could then provide their views on the right interest-rate path for that or other scenarios, or the staff could model several alternate paths, showing different economic outcomes resulting from those policy settings.
"I do think the Federal Reserve could make use of alternative simulations in some kind of policy document, such as the semi-annual monetary policy reports," said David Stockton, the former chief forecaster for the FOMC, who is now a senior fellow at the Peterson Institute for International Economics in Washington. "It helps when there are key uncertainties. It helps frame the economic dimensions of those uncertainties."
Pros:
It would give investors useful templates for how the U.S. central bank might respond to unexpected changes in their outlook.
