Brookings Event on Fed Monetary Policy and the Taylor Rule
Brookings Institution
“The Fed at a Crossroads: Where to Go Next?”
Thursday, October 15, 2015
Key Topics & Takeaways
- Taylor Rule: While conceding that the Taylor Rule can be a “helpful reference” for policymakers, Dudley dismissed the idea that any prescriptive rule can take the place of the FOMC’s “collective assessment” of all factors.
- Legislation: Wessel pointed out that legislative proposals that would require a rules-based monetary policy are supported mainly by Republicans and opposed by most Democrats. Taylor said this is a problem because monetary policy should not be a partisan issue.
Participants
- William Dudley, President, Federal Reserve Bank of New York
- John Taylor, Stanford University
- David Wessel, Brookings Institution
Opening Remarks
David Wessel of the Brookings Institution called the present day an “interesting time for monetary policy” that raises questions about the framework the Federal Reserve uses to make its monetary policy. He then turned to the guest speakers for opening remarks.
President William Dudley of Federal Reserve Bank of New York noted the debate of whether the Federal Reserve should use a formal rule in its policies as opposed to a more flexible approach. He expressed his support for the current, more flexible approach that can take into account more factors in a “complex and ever-changing” world. He denied, however, that he favors total discretion, and stressed that for monetary policy to be most effective it is necessary that businesses are able to anticipate what the Federal Open Markets Committee (FOMC) will do today and in the future.
While conceding that the Taylor Rule can be a “helpful reference” for policymakers, Dudley dismissed the idea that any prescriptive rule can take the place of the FOMC’s “collective assessment” of all factors. He said the Taylor Rule has shortcomings, including the fact that it is not sufficiently forward-looking. Instead, he touted the conduction of monetary policy in a transparent way and with proper communication to the public.
John Taylor of Stanford University stated that the Federal Reserve diverged from a “rule-like” path in 2003, and that this coupled with “regulatory lapses” contributed to the severity of the financial crisis. He commented that it is important for the Fed to move “back in the right direction” by returning to circumstances under which the public can “fairly well understand” the target rates. He denied that the Taylor Rule is overly prescriptive, insisting that it is more “suggestive” in nature and that it was never meant to be mechanical.
Question and Answer
Fed Transparency
Asked how well the Federal Reserve has been communicating its intentions, Dudley responded that the Fed has not done well enough, and attributed this to disagreements over how well the economy is growing. He pointed out, however, that the Fed has provided much more information than ever before, in its forecasts.
Taylor agreed that the Fed is disclosing much more information, but said the releases are missing a crucial element – an explanation of the Fed’s specific strategy and how it would react to different scenarios. When Dudley countered that he believes the Fed has been “very clear” in its strategy, Taylor retorted that “no one knows what you’re doing,” referring to the Fed.
Taylor Rule
Wessel asked Taylor what kind of effect his rule would have had on the Fed’s monetary policy in the lead-up to the crisis. Taylor answered that rates would not have been so low between 2003 and 2005, but also added that the rate cuts in 2008 would have been “almost exactly” what the rule would recommend.
Monetary Policy and Stability
Wessel recalled Taylor’s assertion that monetary policy was a critical cause of the financial crisis and asked if there are other factors to be considered. Taylor replied that there are “absolutely” other factors, but insisted that monetary policy can cause instability and is a powerful tool “for good or for bad.”
Legislation and Fed Independence
Wessel pointed out that legislative proposals that would require a rules-based monetary policy are supported mainly by Republicans and opposed by most Democrats. Taylor said this is a problem because monetary policy should not be a partisan issue. He also denied that the rule would threaten the Fed’s independence because it can point to the rule whenever Congress questions policy decisions.
For more information on this event, please click here.
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Brookings Institution
“The Fed at a Crossroads: Where to Go Next?”
Thursday, October 15, 2015
Key Topics & Takeaways
- Taylor Rule: While conceding that the Taylor Rule can be a “helpful reference” for policymakers, Dudley dismissed the idea that any prescriptive rule can take the place of the FOMC’s “collective assessment” of all factors.
- Legislation: Wessel pointed out that legislative proposals that would require a rules-based monetary policy are supported mainly by Republicans and opposed by most Democrats. Taylor said this is a problem because monetary policy should not be a partisan issue.
Participants
- William Dudley, President, Federal Reserve Bank of New York
- John Taylor, Stanford University
- David Wessel, Brookings Institution
Opening Remarks
David Wessel of the Brookings Institution called the present day an “interesting time for monetary policy” that raises questions about the framework the Federal Reserve uses to make its monetary policy. He then turned to the guest speakers for opening remarks.
President William Dudley of Federal Reserve Bank of New York noted the debate of whether the Federal Reserve should use a formal rule in its policies as opposed to a more flexible approach. He expressed his support for the current, more flexible approach that can take into account more factors in a “complex and ever-changing” world. He denied, however, that he favors total discretion, and stressed that for monetary policy to be most effective it is necessary that businesses are able to anticipate what the Federal Open Markets Committee (FOMC) will do today and in the future.
While conceding that the Taylor Rule can be a “helpful reference” for policymakers, Dudley dismissed the idea that any prescriptive rule can take the place of the FOMC’s “collective assessment” of all factors. He said the Taylor Rule has shortcomings, including the fact that it is not sufficiently forward-looking. Instead, he touted the conduction of monetary policy in a transparent way and with proper communication to the public.
John Taylor of Stanford University stated that the Federal Reserve diverged from a “rule-like” path in 2003, and that this coupled with “regulatory lapses” contributed to the severity of the financial crisis. He commented that it is important for the Fed to move “back in the right direction” by returning to circumstances under which the public can “fairly well understand” the target rates. He denied that the Taylor Rule is overly prescriptive, insisting that it is more “suggestive” in nature and that it was never meant to be mechanical.
Question and Answer
Fed Transparency
Asked how well the Federal Reserve has been communicating its intentions, Dudley responded that the Fed has not done well enough, and attributed this to disagreements over how well the economy is growing. He pointed out, however, that the Fed has provided much more information than ever before, in its forecasts.
Taylor agreed that the Fed is disclosing much more information, but said the releases are missing a crucial element – an explanation of the Fed’s specific strategy and how it would react to different scenarios. When Dudley countered that he believes the Fed has been “very clear” in its strategy, Taylor retorted that “no one knows what you’re doing,” referring to the Fed.
Taylor Rule
Wessel asked Taylor what kind of effect his rule would have had on the Fed’s monetary policy in the lead-up to the crisis. Taylor answered that rates would not have been so low between 2003 and 2005, but also added that the rate cuts in 2008 would have been “almost exactly” what the rule would recommend.
Monetary Policy and Stability
Wessel recalled Taylor’s assertion that monetary policy was a critical cause of the financial crisis and asked if there are other factors to be considered. Taylor replied that there are “absolutely” other factors, but insisted that monetary policy can cause instability and is a powerful tool “for good or for bad.”
Legislation and Fed Independence
Wessel pointed out that legislative proposals that would require a rules-based monetary policy are supported mainly by Republicans and opposed by most Democrats. Taylor said this is a problem because monetary policy should not be a partisan issue. He also denied that the rule would threaten the Fed’s independence because it can point to the rule whenever Congress questions policy decisions.
For more information on this event, please click here.