Should the Fed Regularly Evaluate Its Monetary Policy Framework?
Broadly speaking, a monetary policy framework is the set of tools and processes that a central bank uses to define and attain its high-level economic goals. Components of this framework include the bank’s policy instruments, such as short-term interest rates; operational targets, such as the inflation rate; and the rules and discretion that the bank follows when making its policy decisions. From the inception of central banking, monetary policy makers have adjusted their approach based on advances in economic theory, changes in the structure of the economy, and lessons learned from past policy failures and successes. For instance, the high inflation that the United States experienced beginning in the late 1960s prompted Congress to pass the Humphrey-Hawkins Act in 1978, which directed the Federal Reserve to pursue the “dual mandate” of achieving price stability and maximum employment. More recent changes in the Federal Reserve’s monetary policy framework involve the use of quantitative easing and forward guidance, alternative policy instruments employed when the short-term interest rate was at the effective zero-lower-bound during the Great Recession and the prolonged recovery. The Federal Open Market Committee (FOMC) specified an explicit 2 percent inflation target in a framework document that the Committee began issuing in 2012. This annual "Statement on Longer-Run Goals and Monetary Policy Strategy" is revised every January, but the authors believe that shortcomings in the internal procedure mean that the current process is suboptimal: the time allotted for reviewing the framework is limited, the scope of questions discussed is usually rather narrow, and since 2012, no alternative framework or new direction has been seriously considered. The authors propose that initiating a more comprehensive formal reevaluation of the Fed’s monetary policy framework, conducted at least once every five years to overlap with each chair’s four-year term, is a natural next step to achieve a more stable framework and to strengthen the Federal Reserve as an institution.