Hi Dan, this could be interpreted as a warning about increasing the interest rate and or a slow down in the economy.
NEW YORK (Dow Jones)--The Federal Reserve must be prepared to respond to unexpected changes in the economic outlook, even if the response comes as a surprise to financial markets, Federal Reserve Bank of St. Louis President William Poole said Wednesday.
"Forecast surprises, or forecast errors, are a standard part of the policy landscape," Poole said in prepared comments for delivery before the Charlotte Economics Club, in Charlotte, N.C. "It is very easy to criticize forecasts, and extremely difficult to come up with better forecasts," but even as that's the case, "policy makers must deal with forecast surprises," he said.
Indeed, "the real surprise would arise if the FOMC were to do nothing in the face of a shock calling for action," Poole explained.
The St. Louis Fed president is currently a voting member of the Federal Open Market Committee, the rate-setting arm of the Fed. Poole's speech made little mention of his current economic outlook views, and instead expanded upon his long-held views that forecasting is a difficult issue.
Poole, widely viewed as an inflation-fighting hawk on the FOMC, said in an interview with Dow Jones Newswires earlier this month that the Fed must stand ready to preempt rising inflation, even if it's attended by slower-than-desired growth, if the gains in price pressures appear to be persistent.
In his remarks Wednesday, Poole stressed that "my view should not be interpreted to imply that the FOMC can only act after it has 'prepared' market participants for a change in the intended federal-funds rate.
"There will be times when significant unforeseen economic news will be revealed very suddenly - events that can be appropriately described as 'shocks,'" Poole said. "If, in the judgment of the FOMC, such news calls for policy actions, even though market participants could not have been forewarned of such actions, the FOMC would be derelict in its responsibilities if it failed to act," he said.
"Should an inflationary shock hit the economy, for example, that shock and an increase in the FOMC's target federal-funds rate would both be surprises," Poole said. Even as this may be the case, he added that "the FOMC should communicate its intention about monetary policy as precisely as possible in order to get markets in synch with policy."
The bank president said that the Fed should only react to economic shocks that show signs of lasting for a while, even though it can be difficult to make a judgment about such persistence. He added that one of the greatest difficulties in forecasting comes when economists try to peg "turning points in economic activity." That's because "whatever creates a recession also creates a forecast surprise."
Poole also warned that it would be wrong, even with the problems surrounding forecasting, for market participants to turn up their noses at the endeavor.
"Some dismiss forecasts altogether and view them as irrelevant for policy because their errors are so large. To me, that response is completely wrong," Poole said. "Instead, policy needs to be informed by the best guesses incorporated in forecasts, and by knowledge of forecast errors."
-By Michael S. Derby, Dow Jones Newswires; 201-938-4192; michael.derby@dowjones.com
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