the SHADOW OPEN MARKET COMMITTEE (SOMC) symposium:
The Fed's Monetary Policy Adrift
with keynote speaker Jeffrey M. Lacker,
President of the Federal Reserve Bank of Richmond
and SOMC Founder Professor Allan Meltzer
Position papers addressing global monetary and fiscal policy and banking regulations will be presented by SOMC members Charles Calomiris, Gregory Hess, Marvin Goodfriend, Peter Ireland, and Mickey Levy. Audience participation will be encouraged. Read about the event and RSVP via Eventbrite.
Excerpts from Position Papers
The Unlikely Return to “Normalcy” in U.S. Monetary Policy
by Charles W. Calomiris, Columbia Business School
When will monetary policy return to “normalcy”? To answer that question, one must begin with a definition of normalcy. By normalcy, I mean a monetary policy regime in which the Fed uses changes in the fed funds rate to predictably control variation in aggregate demand. Some believe that a return to normalcy depends only on the eventual exit from the zero-interest-rate policy. I disagree with that point of view. Other major policy changes enacted during the crisis are likely to have long-term impacts that will make it difficult to restore pre-crisis monetary policy normalcy, and these are under-appreciated. As the Fed emerges from the zero-interest- rate policy era, it will be more challenging than ever for the Fed to use traditional monetary policy tools to achieve predictable results. In this essay, I explain why, and conclude by offering some suggestions for how the Fed, and other central banks, can deal with the new combination of challenges that they face.
The Fed Should Put Its 2% Inflation Goal to Work
by Marvin Goodfriend, Carnegie Mellon University and National Bureau of Economic Research
In January 2012, “[f]ollowing careful deliberations at its recent meetings,” the Federal Open Market Committee reported that it had “reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy.” 1 The statement goes on to say that “[t]he Committee intends to reaffirm these principles and to make adjustments as appropriate at its organizational meeting each January.” Emphasizing the time and effort put into developing the statement, the broad agreement, and its forward-looking nature, the FOMC signaled that its statement of principles and goals would provide fundamental guidance for monetary policy in the future.
Political Troubles Forecast for the Fed
by Gregory D. Hess, Claremont McKenna College
With the retirement of Congressman Ron Paul (R-TX), you would think that that the Federal Reserve would face less criticism, political friction, threats of reform, or unwelcome extensions of their responsibilities in the coming 113 th Congress. Unfortunately, this is unlikely to be the case. The Federal Reserve will face significant political troubles in the upcoming Congress, as the legislature continues to pare back the central banks’ ability to independently set policy goals and take decisions. The Fed has no one to blame but itself for opening the political Pandora’s box.
Refocusing the Fed
by Peter Ireland, Boston College
With their federal funds rate target up against its lower bound of zero, Federal Reserve officials have been led -- some would say forced -- to experiment with a variety of new approaches to policymaking. Chairman Bernanke (2012) mentioned several of these novel strategies in his comments at Jackson Hole this past August; the minutes from the September meeting of the Federal Open Market Committee (2012) mention them again. They go by the names “maturity extension,” “forward guidance,” and “large-scale asset purchases.”
Monetary Policy: Little Economic Impact, High Risks
by Mickey D. Levy, Bank of America
US fiscal and monetary policies are both on unsustainable courses. By far, fiscal policy—with its reckless deficit spending and rapidly mounting government debt, inefficient structures of the tax system and spending programs and appallingly dysfunctional budget and policy process—ranks first in terms of harming economic performance and threatening the standards of living of future generations. The Federal Reserve’s monetary policy is also misguided, and although its risks are different in nature and less straightforward than those posed by fiscal policy, they are very important, and particularly pressing in the current fiscal environment. The combination of alarmingly high budget deficits and the Fed’s massive purchases of government and agency bonds (effective debt monetization) involve unacceptably high potential risks
Expansionary Monetary Policy Can Create Asset Price Booms
by Michael D. Bordo, Rutgers University and Hoover Institution, Stanford University
The Subprime Mortgage housing boom that ended in a bust in 2006-2007 leading to a financial crisis in 2008 and the Great Recession may have been related to expansionary Federal Reserve monetary policy from 2002-2006 designed to offset incipient deflation. The housing boom which began in the late 1990s had its origins in a long tradition of policies to encourage home ownership in succeeding presidential administrations, financial innovation, lax regulatory supervision and oversight and corporate malfeasance.