An Opportunity to Improve the Fed’s Strategic Framework

Yesterday, the Shadow Open Market Committee’s meeting in Washington, D.C. addressed issues of how the Fed may improve its policy 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.

by admin_mickey

The Fed’s Strategic Approach to Monetary Policy Needs a Reboot

Fed Chair Powell has announced the Fed will conduct a strategic review of monetary policy later this year. This article, co-written by Mickey D. Levy and Charles I. Plosser, focuses on the characteristics and failures of the strategic framework that the Fed adopted in 2020 and how this framework contributed to monetary policy mistakes and high inflation. It provides suggestions on issues the Fed should consider in its upcoming strategic review.

The paper was presented at the Hoover Monetary Policy Conference, which took place on May 2-3.

In addition to Levy and Plosser, other presenters in the session were Athanasios Orphanides (MIT), Jon Steinsson (Berkeley) and Larry Summers (Harvard). John Cochrane (Hoover Institution, Stanford University) moderated.

 

Article: The Fed’s Strategic Approach to Monetary Policy Needs a Reboot

Slides: The Fed’s Strategic Approach to Monetary Policy Needs a Reboot

by admin_mickey

Fed Chases Inflation from Behind the Curve: Challenges Stresses and Historical Lessons

by admin_mickey