Who is qualified to be a Fed Governor
Cecchetti and Schoenholtz argue that for a Federal Reserve Governor to be effective he/she needs to have three important characteristics:
- Respect for the Mandate: “[D]edication to the Fed’s mandate means displaying unwavering support for the independence that is necessary to ensure that the central bank remains effective over the long run.”
- Analytic Framework: “Embracing an analytical structure both ensures logical consistency and leads to predictability, the importance of which we cannot overstate.”
- Open-mindedness and humility: “[Central bank officials] are humbly aware of the limitations of our knowledge of how the economy will react and how central bank policy actually works.”
Qualifying for the Fed
By: Stephen G. Cecchetti, Kermit L. Schoenholtz – Brandeis University, New York University
From a corridor to a floor system
In 2008 the Federal Reserve switched its operating system from a corridor to a floor system. This move enabled the Fed to significantly expand its balance sheet without the usual inflationary pressure that would accompany large scale asset purchases. In adopting a new operating regime, the Fed has subjected itself to greater political influence for two reasons:
- The set of decision makers is reduced. In a floor system, monetary policy is conducted through the interest on reserves (IOR) which is set by the seven members of the Board of Governors. In a corridor system, on the other hand, the federal funds rate (FFR) was set by the twelve voting members of the FOMC. This reduction increases the appointment power of the President.
- The Fed now directs IOR payments primarily to large banks and foreign financial institutions. As such, the Fed’s policy might easily be construed as making transfers from the American taxpayer to large banks and foreign financial institutions, providing more bargaining power to Congress.
Central Bank Independence and the Federal Reserve’s New Operating Regime
Authors: Jerry L. Jordan, William J. Luther
From: Federal Reserve Bank of Cleveland, Florida Atlantic University
Upcoming changes to the Fed’s monetary policy strategy
A politicized debate over the monetary policies of the Federal Reserve System has generated concerns about the future of its long tradition of deciding policy with minimal influence of noneconomic considerations. As it happens, however, the Fed is conducting a major review this year of its monetary policy strategy. The most likely outcome of the review is that the Fed will commit itself to intentionally overshooting its inflation target after episodes at the zero bound in which it has undershot the target.
Changes Are Coming to the Fed’s Monetary Policy Strategy
By: Joseph E. Gagnon, Christopher G. Collins – Peterson Institute for International Economics
