President Hammack: “Explaining my reaction function is not a prediction for policy. It’s describing how I expect policy to adjust as conditions change.”

In a new speech, President Hammack described why she explains her reaction function and talked about what feeds into it. She also gave her views on the economy and monetary policy.

Federal Reserve Bank of Cleveland president and CEO Beth Hammack delivered a new speech, “Trimming the Sails: Communicating My Reaction Function,” in Cleveland at the National Association of Business Economics (NABE) annual meeting.

In the speech, Hammack described why she believes it’s important to help the public understand her “reaction function,” or how she thinks policy is likely to proceed, conditional on a specific set of circumstances. Hammack shared that she relies on economic data, financial conditions, forecasts, risks, and what she hears directly from people living in the economy when formulating her monetary policy views.

“As a policymaker, I believe I have a responsibility to the public to explain why I make the decisions I make. Transparency has the benefit of allowing consumers, businesses, and financial markets to make better-informed decisions,” said Hammack.

But policymakers should rarely give firm predictions about the path for the federal funds rate, Hammack said. Setting monetary policy is like sailing: The destination is clear, but the path to get there is shaped by ever-changing conditions.

Even so, policymakers can give the public some sense of where they’re headed.

“I can explain where I’m going, what I’m seeing, and how I might respond to shifting winds or waves or weather,” she said.

Key quotes on...

Her reaction function

• “Explaining my reaction function is not a prediction for policy. It’s describing how I expect policy to adjust as conditions change. On the other hand, when financial markets know how policy is likely to react, they re-price in anticipation of these moves.”
• “Forecasts matter because of the lags between monetary policy actions and their effect on the economy.”
• “As a policymaker, I believe I have a responsibility to the public to explain why I make the decisions I make.”

Inflation expectations

• “With each passing month, persistently elevated inflation raises the risks of an inflationary mindset becoming entrenched in the economy.”
• “I see inflation pressures as relatively broad-based rather than concentrated in one component.”

Monetary policy

• “Considering all the inputs that factor into my reaction function, a restrictive monetary policy stance is appropriate to ensure a timely return to 2 percent inflation.”
• “When feasible, I generally think it’s preferable to make smaller adjustments, and to do so relatively quickly, rather than to wait and risk needing a larger course correction.”

Read the full text: Trimming the Sails: Communicating My Reaction Function

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Dani Carlson, dani.carlson@clev.frb.org, 216.672.1264