Fixing the Fed

Abstract

This paper reviews recent developments in US monetary policy and then discusses some possible reforms that might be considered to modify the behavior of the Federal Reserve System. Since its creation a century ago, the Federal Reserve System has grown from a narrowly defined central bank dominated by JP Morgan and other large banks into a Soviet style economic planning and management agency run by and for academic economists. The Fed's actions since the 2008 crisis have taken on a quasi-fiscal character and often exceed the agency's legal authority, but so far nobody in the White House or the Congress has objected. Meanwhile, many of the policies put in place by the Fed have arguably hurt economic growth and increased systemic risk in the financial markets, suggesting that there is no positive trade-off between the cost of Fed manipulation of asset prices and credit spreads and whatever benefits these activities provide. How do we think about the relationship between the Fed and the other arms of our federal government? Is talking about "fixing" the Fed overly ambitious given's the agency's growing power?

Keywords: Federal Reserve, Federal Open Market Committee, Volcker, Bernanke, Yellen, financial repression, negative interest rates, quantitative easing, monetary policy, rules based, Reconstruction Finance Corporation, full employment, Humphrey Hawkins

JEL Classification: E1, E2, E3, E4, E5, G1, H3, H6, N1