The US Federal Reserve's recent changes to its monetary policy framework are ill-advised and potentially harmful. They also fail to address a number of other crucial problems. The Fed should scrap this new approach, and instead make full and effective use of the policy instruments it has – or could have – at its disposal.
NEW YORK – On August 27, the US Federal Reserve issued a press release summarizing updates to its longer-run goals and monetary-policy strategy, and Fed Chair Jerome Powell discussed the revisions at greater length in a speech later the same day. The two documents are a collection of type I and type II errors. If the Fed were to pursue the new strategy determinedly, it could inflict real economic damage on the United States and the world.
Let’s begin with a minor error of omission. In his speech, Powell referred to the Fed’s congressionally mandated goals of maximum employment and price stability – omitting, as is the norm, its third congressionally mandated objective of moderate long-term interest rates. The obvious tool for managing long-term rates is yield-curve control, but the policy-setting Federal Open Market Committee (FOMC) does not mention this instrument even in the context of pursuing maximum employment and stable prices.
But the real trouble starts with the FOMC’s reinterpretation of “maximum employment.” The press release states that the committee’s policy decision will be informed by its “assessments of the shortfalls of employment from its maximum level.” The FOMC’s original strategy statement, adopted in 2012, referred to “deviations from its maximum level.”
NEW YORK – On August 27, the US Federal Reserve issued a press release summarizing updates to its longer-run goals and monetary-policy strategy, and Fed Chair Jerome Powell discussed the revisions at greater length in a speech later the same day. The two documents are a collection of type I and type II errors. If the Fed were to pursue the new strategy determinedly, it could inflict real economic damage on the United States and the world.
Let’s begin with a minor error of omission. In his speech, Powell referred to the Fed’s congressionally mandated goals of maximum employment and price stability – omitting, as is the norm, its third congressionally mandated objective of moderate long-term interest rates. The obvious tool for managing long-term rates is yield-curve control, but the policy-setting Federal Open Market Committee (FOMC) does not mention this instrument even in the context of pursuing maximum employment and stable prices.
But the real trouble starts with the FOMC’s reinterpretation of “maximum employment.” The press release states that the committee’s policy decision will be informed by its “assessments of the shortfalls of employment from its maximum level.” The FOMC’s original strategy statement, adopted in 2012, referred to “deviations from its maximum level.”