Perspectives on Monetary and Credit Policy

The Federal Open Market Committee’s decision to issue “forward guidance” about how long it intends to keep interest rates exceptionally low has seemed to confuse market participants about the extent to which that guidance should be viewed as a commitment. The Fed’s purchase of private assets, such as mortgage-backed securities (MBS), distorts the relative cost of credit among different borrowers. Moreover, buying MBS encourages the continuation of a flawed housing finance model based heavily on government-sponsored enterprises. The Fed’s engagement in credit policy places it at risk of being subject to short-term pressures associated with electoral politics. The Fed should exhibit humility when making policy decisions, focusing on price stability, which it can control, and being cautious about trying to directly affect labor market outcomes, which are driven by many factors beyond the Fed’s control.