In many ways, the Fed has begun to bring monetary policy back on track as it emphasizes a strategy and the use of monetary policy rules:
On January 18 of last year, former Chair Janet Yellen described the Fed’s strategy for the policy instruments, saying that “When the economy is weak…we encourage spending and investing by pushing short-term interest rates lower….when the economy is threatening to push inflation too high down the road, we increase interest rates…” In a speech the following day, she compared this strategy with the Taylor rule and other rules, and she explained the differences.
On February 11 of last year, former Vice-Chair Stanley Fischer gave a talk with a similar message, comparing actual policy with monetary rules and explaining how rules-based analyses feed into FOMC discussions to arrive at policy decisions.
On July 7 of last year, the Fed added, for the first time ever, a whole new section on “Monetary Policy Rules and Their Role in the Federal Reserve’s Policy Process” in its Monetary Policy Report . It noted that “key principles of good monetary policy” are incorporated into policy rules. It listed specific policy rules, including the Taylor rule and variations on that rule. It showed that the interest rate was too low for too long in the 2003-2005 period according to the Taylor rule. It showed that, according to three of the rules, the current fed funds rate should be moving up.
On February 23 of this year, the Fed, now with new Chair Jerome Powell, again included a whole section on policy rules in its latest Monetary Policy Report, elaborating on last July’s Report and thus indicating that the new approach will continue.
On February 27 and March 1 of this year, in his first testimony in the House and Senate as Fed Chair, Jerome Powell referred explicitly to making monetary policy with policy rules. He said that “In evaluating the stance of monetary policy, the FOMC routinely consults monetary policy rules that connect prescriptions for the policy rate with variables associated with our mandated objectives. Personally, I find these rule prescriptions helpful. Careful judgments are required about the measurement of the variables used, as well as about the implications of the many issues these rules do not take into account. I would like to note that this Monetary Policy Report provides further discussion of monetary policy rules and their role in the Federal Reserve’s policy process, extending the analysis we introduced in July.” This emphasis on rules and strategy did not go unnoticed by those who follow policy: As Larry Kudlow put it: “I’ve never seen that in any testimony before….and I think that’s progress.”
On March 8 of this year, the Fed posted a new web site on the principles of sound monetary policy, Monetary Policy Principles and Practice, with a very helpful note on Policy Rules and How Policymakers Use Them.
While the Fed has not yet endorsed the “Monetary Policy Transparency and Accountability Act,” these reforms represent substantial progress in that direction and should be acknowledged.