New Leadership at the Federal Reserve

As Chairman of the Federal Reserve for the past 18 years, Alan Greenspan deserves praise for his stewardship of monetary policy. He has guided the Fed and monetary policy in a way that has led to low and stable inflation. But if Greenspan's record clearly deserves praise, he could have done more to move monetary policy into the 21st century and prepare the institution for the future. Greenspan has relied heavily on his personal judgment and has argued repeatedly that the Fed must have extensive flexibility to respond to the economic environment. But if Greenspan's judgment, skill, and luck have served him and the country well, it is dangerous to rely so heavily on the judgment of a single individual. When he departed, he took with him his skill and judgment, as well as his credibility and his personal commitment to low inflation. The Fed he leaves behind has no explicit institutional commitment to long‐run price stability. This article argues that by operating with a set of rules and guidelines, or at a minimum clearly stated institutional objectives, the Fed would eliminate much of the second guessing about what it is doing and why, and the associated volatility in markets. More generally, the benefits of more explicit guidelines for monetary policy include: • Increasing public understanding of monetary policy, including what it can and cannot do. • Increasing transparency and accountability. Most organizations have clear goals and we hold their leaders accountable. The Fed is different. The Fed seems to be held accountable for all things economic and thus it is truly accountable for nothing. It never has to explain its actions and what went right or wrong. • Establishing a clear focus for the Fed regarding its goals and objectives. • Creating increased confidence that sound monetary policy will be followed in the future.