Monetary Policy

An Agenda to Reform Monetary Policy

“Getting monetary policy right requires meeting the goal of monetary neutrality under conditions of imperfect knowledge.”

— David Beckworth

A defining feature of U.S. monetary policy over the past eight years has been its ad hoc nature. During this time the Federal Reserve conducted a series of large-scale asset-purchase programs and provided forward guidance on interest rates in a very unpredictable manner. These programs were supposed to promote price stability and spur a strong recovery, but proved more effective at creating uncertainty about the aims and direction of monetary policy.

This failure to provide stability and confidence is not simply the result of a series of individual mistakes by the central bank. They are the byproduct of a flawed monetary regime. Recent years have shown that our current monetary arrangements leave policymakers unprepared for the kind of supply and demand shocks to which modern economies are liable. They leave policymakers, as well, unable to prevent or effectively fight sharp recessions. And these inadequacies tempt the Federal Reserve to experiment in ways that increase monetary uncertainty. It is time for a new path.