In December, AIER held its inaugural monetary conference, Building a Better Fed Framework, at The George Washington University in Washington, DC. As the Federal Reserve embarks upon its monetary policy and strategy framework review, AIER brought together leading monetary scholars to examine the Fed’s framework, past and present, and explored opportunities for creating a better monetary future.
The conference featured Federal Reserve Board Governor Christopher J. Waller as the keynote speaker, an opening address by former St. Louis Fed President Jim Bullard, and three sessions that asked: “How Did We Get Here?,” “What Have We Learned?,” and “How Can the Fed Do Better?”
A lot has changed in the economy since the Fed’s last review concluded in 2020. Prior to the pandemic, central banks across the globe worried about interest rates at the zero lower bound and inflation consistently below target. Looking to pack in more monetary policy punch, the Fed adopted its current monetary framework, Flexible Average Inflation Targeting or FAIT, and added that its maximum employment goal was “broad-based and inclusive.” To what extent these changes played a role in the runup in inflation in 2022 and its persistence still today was a key point of discussion in the day’s proceedings.
Opening the conference, Jim Bullard, former St. Louis Fed President and CEO and current Dean of the Mitch Daniels School of Business at Purdue University, laid the groundwork. He described what the Fed’s framework is: a statement of the Fed’s longer run goals that is meant to be “constitutional in nature.” He mentioned the limits of what the review can cover. Bullard also shared ideas on what can be included in the Fed’s next framework. He recommended that the Fed include a statement on what it will do in times of higher inflation that FAIT is not geared towards, as well as including statements about the Fed’s balance sheet, financial stability, and global influences, where agreement exists.
Session 1: How Did We Get Here?
The first session asked, “How Did We Get Here?”
Carola Binder, associate professor of economics at the University of Texas at Austin, looked at how historically framework reviews were necessary and useful—and did not always originate from the Fed. Cato Institute’s George Selgin offered insights into how the Fed’s views on achieving its dual mandate can help or hinder monetary policy goals, and offered an alternative that could improve the Fed’s framework: SAIT, “see-through” average inflation targeting. William J. Luther, associate professor of economics at Florida Atlantic University, took a deep dive into the pandemic-fueled inflation and whether it stemmed from greedflation or the Fed’s FAIT framework.
Session 2: What Have We Learned?
Session 2 explored lessons learned from the Fed’s current monetary policy framework as well as changes to its operating framework dating back to the financial crisis. Bank Policy Institute’s Bill Nelson, a former Fed economist, looked deeply into the Fed’s move from a corridor to a floor system in executing monetary policy. Thomas Hogan, associate professor at The University of Austin, explored the heightened role (and shortcomings) of the Fed’s tool of forward guidance. David Beckworth of the Mercatus Center and host of the MacroMusing podcast rounded out the session with a survey of various critiques of the Fed’s FAIT framework.
Session 3: How Can the Fed Do Better?
The last session of the day put on the table some novel—and arguably better—framework options to help the Fed achieve its mandate of maximum employment and stable prices. Athanasios Orphanides, professor of practice at MIT and former governor of the Central Bank of Cyprus, highlighted the importance of monetary rules and how a simple rule, such as a modified Taylor rule or a natural growth rule, could improve Fed policymaking. Evan Koenig, recently retired vice president and senior advisor at the Dallas Fed, went into detail on the merits of nominal GDP targeting, including how it would offset wage stickiness, avoid zero lower bound problems, and improve financial stability, among others. Lawrence H. White concluded the session by putting paid to any calls for the Fed to raise its inflation target above 2 percent, noting its economic harms and contrasting it with the benefits of a zero or even a negative inflation rate.
Keynote: Christopher J. Waller, Federal Reserve Board of Governors
Concluding the day was Fed Board Governor Chris Waller. In his prepared remarks on the economic outlook, he said he felt “like an MMA fighter who keeps getting inflation in a choke hold, waiting for it to tap out yet it keeps slipping out of my grasp at the last minute.” But he concluded, “submission is inevitable—inflation isn’t getting out of the octagon.” In conversation afterward, Waller talked about the importance of observing real-world activity, not just models, in reference to his Beveridge curve work that led him to the view that rates could tighten sooner than others at the Fed. He touched on the Fed’s floor system and the role of the neutral rate of interest. Waller also commented that the long and variable lags of monetary policy refer to its “maximum” effect—a policy statement can affect the market immediately.
Conclusion
It was a jam-packed day with a smattering of monetary history, monetary theory, real-world effects of monetary policy, and monetary ideas for the future. Hate that you weren’t there? Don’t worry. Thanks to CiVL you can watch the show!
But next time, we hope to see you in person.
