A New Year’s Resolution for the Federal Reserve

It should embrace clear monetary-policy rules and explain its reasoning for departing from them

By Jason Furman. Excerpts:

"the humans in charge of the central bank should be required to establish consistent operational principles and explain their reasoning when they depart from them.

At the end of 2023 the median Federal Open Market Committee member expected that 2024 would bring economic growth of 1.4%, core inflation of 2.4% and three cuts in the federal-funds rate. Instead the economy is on track for about 2.5% growth and 2.8% core inflation. With the economy much stronger than expected and inflation more persistent, the Fed should have scaled back its rate moves."  

"insofar as the Fed has substituted its judgment for rules, the rules look better than the judgment. The Fed wouldn’t have needed so many supersize hikes in 2022 and 2023 had it followed any version of a Taylor rule, which would have called for rate increases starting in 2021 based on inflation and the unemployment rate. The initial progress on inflation in the second half of 2023 would have led to an earlier adjustment in rates without the need to catch up with a supersize cut in September 2024."

"the Fed should pick one rule, or a suite of rules, and publish what it would dictate at every FOMC meeting. If the committee chose a different course than the rule or rules would recommend, it would have to explain what judgments led it to do so."

"to the extent the Fed departs from its rule over time, it must do so without prejudice. It is always too tempting to find excuses for why rates should be lower rather than higher. At any given time that may be true, but it adds up to an inflationary bias in monetary policy."

"Placing more weight on rules at the Fed could solve several problems. It would make monetary policy more predictable and understandable, reducing market volatility and enabling better investment decisions. It could also avoid the biases that have crept into the Fed’s decision-making in recent years."