Monday June 25, 3:45 pm Eastern Time
Cleveland Fed article backs interest rate
restraint
WASHINGTON, June 25 (Reuters) - Central bankers must tread softly
when making monetary policy so as not to disturb natural economic patterns
with decisions based on murky information about the economy, a regional
Federal Reserve bank said.
In an article in its annual report released earlier this month, the
Cleveland Fed argued that current measurements are ``simply
inadequate to the task'' of accurately assessing the health of
the economy, a problem that poses a risk for setting monetary
policy. It also advocated letting economic cycles run their
course.
``It's not just that gaps between potential and actual output --
to the extent they exist -- are difficult to perceive,'' the regional
Fed said in the report. ``Given our current inability to measure
economic activity, they may be impossible to perceive.''
The Cleveland Fed noted that the economy's shift to a more
high-tech and services-based environment and away from a reliance on manufacturing and agriculture
makes gauging the economy that much more difficult.
``Until these systems reflect the accumulated lessons of economic theory and evidence, monetary policy
will struggle to deliver the successful outcomes that characterized the last two decades,'' the regional Fed
said.
The article also advocated a somewhat hands-off approach to monetary policy, even when the economy
softens, as it has this year.
``Just as episodes of relatively rapid growth may be part of the natural ebb and flow of economic activity,
so, too, are episodes of slower growth -- and aggressive counter-cyclical monetary policy poses significant
risk,'' the Cleveland Fed said.
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