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The Murky Future of Monetary Policy

Author

Listed:
  • Mickey D. Levy

  • Charles I. Plosser

Abstract

In August 2020, the Federal Reserve unveiled its new strategic framework. One major objective of the Fed was to address its concerns over the potential consequences for the conduct of monetary policy when the policy rate was constrained by its effective lower bound. This article concludes that there are significant flaws in the new strategy and that it encourages a more discretionary approach to monetary policy and increases the risks of policy errors. The new framework is an overly complex and asymmetric flexible average inflation targeting scheme that introduces a significant inflationary bias into policy and expands the scope for discretion by broadening the Fed's employment mandate to "maximum inclusive employment." In a postscript, the article describes how quickly the flaws have been revealed and urges a reset toward a more systematic and coherent strategy that is transparent and broadly understood by the public.

Suggested Citation

  • Mickey D. Levy & Charles I. Plosser, 2022. "The Murky Future of Monetary Policy," Review, Federal Reserve Bank of St. Louis, vol. 104(3), pages 178-188, July.
    • Handle: RePEc:fip:fedlrv:94271
    DOI: 10.20955/r.104.178-88
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    References listed on IDEAS

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    1. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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