Musalem says Fed must explain decisions without policy pledges

St Louis Fed President Alberto Musalem stated that central bankers should not make promises, but rather explain to the public how and why they make policy decisions. He emphasized that the delegated power over interest rates also obligates the Federal Reserve (Fed) to clarify "how and why that power is used." A clear framework helps policy transmission by aligning private expectations with the Fed's intentions, thus improving the trade-offs between inflation and employment.

The Fed should communicate its framework without promising specific interest rate paths. If the public understands this framework, market participants can focus on data rather than guessing the Fed's reactions. Musalem warned that failing to communicate the framework can lead to risks in terms of inflation. He reiterated that a predictable, explained framework is essential for the central bank's democratic legitimacy.