An Opportunity to Improve the Fed’s Strategic Framework

Here are a paper and presentation I prepared on the issues with Charles Plosser, former President of the Federal Reserve Bank of Philadelphia. We describe how the asymmetries of the 2020 strategic plan, particularly its FAIT scheme and dropping of preemptive monetary tightening, was driven by the Fed’s excessive fears of too-low inflation and the Effective Lower Bound.

We recommend restoring symmetry to the strategic framework, in part by re-establishing a clear symmetrical 2% inflation target, and encourage the Fed to consider systematic rules as an input to its discretionary conduct of monetary policy. We recommend many changes to the quarterly SEPs: its infamous dot plot should include a Taylor Rule estimate (dot) of the appropriate interest rate that would achieve the median FOMC economic and inflation projections; information about the Fed’s balance sheet; and an annual scenario analysis exercise with alternative projections. In contrast, I’m sure the Fed’s currently ongoing strategic review will be a tame and closely controlled review.