A Limited Central Bank

The President of the Philadelphia Federal Reserve Bank from 2006–2015 discusses the Fed's essential role as preserver of the currency's purchasing power and how the institution might be improved to better fulfill that role. To that end, the author proposes the imposition of four limits on the central bank that, by restricting its discretion, can be expected to improve outcomes and accountability.

• First, limit the Fed's monetary policy goals to a narrow mandate in which price stability is the sole, or at least the primary, objective;
• Second, limit the types of assets that the Fed can hold on its balance sheet to Treasury securities;
• Third, limit the Fed's discretion in monetary policymaking by requiring a systematic, rule‐like approach; and
• Fourth, limit the boundaries of its lender‐of‐last‐resort credit extension.

These changes, by creating a more limited central bank, would help preserve the central bank's independence, thereby improving the effectiveness of monetary policy. They would also make it easier for the public to hold the Fed accountable for its policy decisions.     

美联储停止缩表的原因、影响及中国对策

近期美联储停止缩表引起广泛关注。美联储停止缩表主要有以下几个原因：一是货币需求大幅上升,二是美联储控制短期利率的能力出现下降,三是美国经济前景存在不确定性。此外,美联储停止缩表还有助于继续发挥财政作用、改善货币政策传导效率、降低污名效应、降低私人部门安全资产的供应以及降低对美联储信用风险和银行清算风险。美联储停止缩表对美国和中国都会产生十分广泛的影响。对美国的影响主要有：资产价格将获得支撑、投资可能出现过热、通胀可能出现阶段性上升、金融风险可能加大、美联储独立性可能受到影响、可能加剧收益率曲线倒挂;对中国的影响主要有：人民币汇率压力有望缓解、资产价格可能上升、短期资本流入可能增多。因此,中国货币政策应保持定力,密切关注国际资本流动趋势的变化,防范资产价格暴涨风险,同时,应加强人民币汇率风险管理。     

Monetary Policy Implementation: Making Better and More Consistent Use of the Federal Reserve's Balance Sheet

Since December 2015, the Federal Reserve has operated a new “floor system” in which it brings about desired changes in its targeted federal funds rate by managing the interest rate it pays on bank reserves and other short‐term liabilities. The design of this new system reflects the tendency of Fed officials to view monetary policy as affecting the economy through Keynesian” interest rate channels. From this Keynesian perspective, policy actions that change the size of the balance sheet are seen as tools for influencing credit market conditions that operate in addition to and independently of the Fed's monetary policy stance. The alternative monetarist framework proposed by the author views monetary policy and its effects as operating through the interaction between money supply and demand. Use of this framework makes clear that, even under a floor system, monetary policy actions designed to affect the aggregate price level and the rate of inflation must be accompanied sooner or later by traditional open market operations that have implications for the size and composition of the Fed's balance sheet. Use of the monetarist framework also underscores the likelihood that the Fed, by paying interest on reserves, has unknowingly contributed to the restrictiveness of its own monetary policies since the financial crisis, a period during which inflation has run consistently below target. More generally, the monetarist framework downplays the importance of the zero lower interest rate bound and suggests that monetary policy could be conducted more effectively by adopting and adhering to a consistent, rule‐like manner during good times and bad.     

How to Promote Fed Independence: Perspectives from Political Economy and History

In two short histories of the independence of the U.S. Federal Reserve Bank since its creation in 1913—the first with respect to the Fed's monetary policymaking, the second focused on its regulatory policymaking—the author shows that the range of the Fed's powers has varied greatly over time, and that changes in those powers have had major effects on the extent of Fed independence. Moreover, the shifts over time in Fed powers reflect, to a significant degree, conscious trade‐offs by Fed leaders. A large number of somewhat surprising Fed positions on important regulatory matters can be explained as more or less deliberate attempts to preserve the Fed's monetary powers from political interference by yielding some of its independence in exercising its regulatory authority. In a case involving one of the most destructive U.S. financial regulatory policies, the Fed's effective neutrality on, and thus failure to support, the elimination of restrictions on interstate branch banking is seen as contributing to the chronic instability of the U.S. banking system, which has suffered some 20 major crises since the early 1800s (as compared to the crisis‐free Canadian system, with its nationwide banking from its inception). The Fed's reluctance to intervene is attributed to its unwillingness to antagonize powerful Congressional supporters of state banking interests and, more generally, to a “game of bank bargains” that can be seen at work in the political economy of virtually all countries. In more recent times, the most costly episode in this time‐honored game features a series of implicit or, in some cases, explicit agreements between large U.S. banks and urban activist groups—under the aegis of the Community Reinvestment Act, and with the oversight and implicit blessing of the Fed—to make on the order of $4.6 trillion loans to “subprime” borrowers in exchange for the activists’ (and the Fed's) support in Congressional merger hearings. The resulting nationwide debasement of mortgage underwriting standards and sheer volume of “toxic assets,” in combination with clearly inadequate capital requirements (which the Fed also failed to correct), are viewed as if not the principal cause of the crisis, a far bigger contributor than, say, the Fed's widely criticized unwillingness to tighten monetary policy in the early 2000s. To prevent the Fed from continuing to sacrifice its independence in regulatory matters to preserve its freedom to conduct monetary policy, the author proposes that authority for regulatory and monetary policy be vested in two separate regulatory bodies. If carried out, such a policy change would enact a proposal made by then Treasury Secretary Hank Paulson in 2008, just before the global financial crisis hit.     

Evolving dynamics of the relationship between US core inflation and unemployment

Labor market dynamics in the US are changing due to long-term factors including decelerating labor force growth, rising age of the labor force, and the rapid advance of e-commerce, as well as the one-time downward adjustment during 2009–2013 of the size of state and local government work forces. We discuss some of the controversies revolving around how to analyze labor markets in this dynamic environment from the perspective of monetary policymaking, given the dual mandate of the Federal Reserve to encourage both full employment and price stability.Our statistical research documents the changing association between US unemployment and core inflation. There was a perceived trade-off between inflation and unemployment in the 1950s and 1960s that gave way to stagflation in the 1970s, when both unemployment and inflation were rising. The 1980s were a transition period where the trade-off was perceived to have returned. This trade-off has not been so clear, however, when one looks at the last twenty years. Since 1995, a period of stable and low inflation was consistently observed despite considerable cycles in the unemployment rate.Our theoretical discussion provides a dynamic interpretation of the shifting nature of labor markets, with the objective of pointing the way for future research while highlighting crucial differences in possible interpretations that could fuel debate, both inside and outside the Fed, over how the Fed should manage its dual mandate. The dynamic changes being seen in US labor markets all suggest that the effectiveness of monetary policy to encourage full employment may be vastly overstated. If this interpretation is correct, the Fed may need to reconsider how to manage its dual mandate and react less aggressively to perceived labor slack that may be due to longer-term structural shifts over which the Fed has no influence.     

Words that shake traders : The stock market's reaction to central bank communication in real time

This paper investigates the effects of Federal Reserve's decisions and statements on U.S. stock and volatility indices (Dow Jones Industrial Average, NASDAQ 100, S&P 500, and VIX) using a high-frequency event-study analysis. I find that both the surprise component of policy actions and official communication have statistically significant and economically relevant effects on equity indices, with statements having a much greater explanatory power of the reaction of stock prices to monetary policy. For instance, around 90% of the explainable variation in S&P 500 is due to the surprise component of Fed's statements. This paper also shows that equity indices tend to incorporate FOMC monetary surprises within 40 min from the announcement release. Finally, I find that these results are robust along several dimensions. In particular, I consider different estimators, such as the Generalized Empirical Likelihood, and I extend the sample to include the recent period of heightened financial stress. This sensitivity analysis corroborates that central bank communication about its future policy intentions is a key driver of stock returns.     

美联储百年沧桑:目标、框架与可信度

在美联储成立百年之际,现任美联储主席伯南克系统回顾了过去100年中美联储在政策目标、政策框架、可信度和沟通方面的变革。成立初期,美联储以维护金融稳定为目标的政策框架主要受实质票据学说和金本位制度的影响。大萧条时期,促进就业和价格稳定逐渐成为美联储的新目标。大通胀和大通缩时期,获得货币政策独立性的美联储控制通胀的能力逐步成熟。大稳健时期,货币政策目标和框架更加清晰,货币政策透明度逐渐提高。金融危机以来,维持金融稳定上升到与货币政策同等重要的位置,货币政策透明度明显改善,预期管理日益重要。未来,中央银行的理念和实践还将不断变革。     

FOMC Forecasts as a Focal Point for Private Expectations

We explore empirically the theoretical prediction that public information acts as a focal point in the context of the U.S. monetary policy. We aim at establishing whether the publication of Federal Open Market Committee (FOMC) inflation forecasts affects the cross‐sectional dispersion of private inflation expectations. Our main finding is that publishing FOMC inflation forecasts has a negative effect on the cross‐sectional dispersion of private current‐year inflation forecasts. This effect is found to be robust to another survey data set and to various macroeconomic controls. Moreover, we find that the dispersion of private inflation forecasts is not affected by the dispersion of views among FOMC members.     

Monetary Policy in a Low‐Inflation Environment: Developing a State‐Contingent Price‐Level Target

A number of academic studies find that either price‐level targeting or temporary above‐average inflation are nearly optimal policies to address a liquidity trap crisis. Still, central bankers and the public generally question whether even a temporarily higher inflation rate could be beneficial in addressing a liquidity trap or could be consistent with price stability over the longer term. At the same time, however, the Federal Reserve's projections for high unemployment and low inflation do not seem to be consistent with the best monetary policies to address the Fed's dual mandate responsibilities. Accordingly, it is useful to seriously discuss these potentially beneficial alternative policies.     

The Asymmetric Impact of Monetary Policy on Currency Markets

This study examines whether tightening and easing actions of the Federal Reserve symmetrically influence currency markets. Using daily data on four exchange rates from 1989 to 2001, we find that changes in the Fed's interest rate target are positively related to changes in the value of the dollar. Surprises associated with monetary tightening have a larger announcement effect as compared to monetary easing for the British pound, German mark, and Canadian dollar, whereas the opposite is true for the Japanese yen. The results appear to be driven by the reactions of foreign central banks to Fed actions, the Fed's credibility as a policymaker, and by the change in the Fed's disclosure policy beginning in 1994.     

美联储发布利率预测的目的及影响

2012年1月26日,美联储公开市场委员会（FOMC）首次发布对2012年内以及未来较长期间联邦基金利率水平的预测。这是美联储提高货币政策透明度和有效性的最新举措。美联储长期维持超低利率有助于本国经济复苏,但其负面影响不容忽视。     

Credit risk dynamics in response to changes in the federal funds target: The implication for firm short-term debt

The recent credit crisis has raised a number of interesting questions regarding the role of the Federal Reserve Bank and the effectiveness of its expected and unexpected interventions in financial markets, especially during the crisis, given its mandate. This paper reviews and evaluates the impact of expected and unexpected changes in the federal funds rate target on credit risk premia. The paper's main innovation is the use of an ACH-VAR (autoregressive conditional hazard VAR) model to generate the Fed's expected and unexpected monetary policy shocks which are then used to determine the effects of a Federal Reserve policy change on counterparty credit risk and more importantly short-term firm debt financing. The findings answer a longstanding question sought by researchers on the effect of policy makers' announcements on firm debt financing. The results clearly show that the Federal Reserve influences short-term debt financing through the credit channel for both expansionary and contractionary monetary policies. In particular, we find that the growth in counterparty risk appears less responsive to anticipated responses in the Fed funds rate that fail to materialize than to an unanticipated increase in the federal funds rate. Finally, we also document that the results appear to validate the Feds interventions in financial markets to stem counterparty risk and to make liquidity more readily available to firms.     

次贷危机后美联储非常规货币政策及退出机制分析——基于美联储资产负债表的视角

次贷危机发生后,很多国家中央银行都采取了大量的非常规货币政策来确保金融系统的稳定和促进经济增长,尤其以美联储的非常规货币政策最具代表性。虽然非常规货币政策复杂多变,但是通常在央行资产负债表中清晰记录。借助于美联储资产负债表,能够全面梳理次贷危机后美联储的非常规货币政策,有助于深入理解非常规货币政策的实施和退出机制。     

Eyes on the prize: How did the fed respond to the stock market?

Since the stock market boom of the 1990s, many have suggested the Federal Open Market Committee (FOMC) has adopted an unannounced policy goal of supporting equity values. This paper offers a new approach to disentangle the relationship between changes in equity values and monetary policy. Specifically, the paper distinguishes the FOMC's reaction to forecasts of traditional goal variables, which may depend on equity prices, from the FOMC's independent reaction to changes in equity prices. By using actual forward-looking variables examined by the FOMC before each action (the “Greenbook” forecasts), the authors find little evidence to support the proposition that the FOMC responds to stock values, except as filtered through a forecast of accepted monetary policy goal variables.     

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.

     

Risk management,nonlinearity and aggressiveness in monetary policy: The case of the US Fed

We contribute to the empirical literature on the risk-management approach to monetary policy by estimating regime switching models where the strength of the response of monetary policy to macroeconomic conditions depends on the level of risk associated with the inflation outlook and risk in financial markets. Using quarterly data for the Greenspan period we find that: (i) risk in the inflation outlook and in financial markets are a more powerful driver of monetary policy regime changes than variables typically suggested in the literature, such as the level of inflation and the output gap; (ii) estimation of regime switching models shows that the response of the US Fed to the inflation outlook is invariant across policy regimes; (iii) however, in periods of high economic risk monetary policy tends to respond more aggressively to the output gap and the degree of inertia tends to be lower than in normal circumstances; and (iv) the US Fed is estimated to have responded aggressively to the output gap in the late 1980s and beginning of the 1990s, and in the late 1990s and early 2000s. These results are consistent with Mishkin (2008)’s view that in periods of high economic risk monetary authorities should respond aggressively to changes in macroeconomic conditions while the degree of inertia should be lower than in normal circumstances.     

What determines the stock market's reaction to monetary policy statements?

We find that information communicated through monetary policy statements has important business cycle dependent implications for stock prices. For example, during periods of economic expansion, stocks tend to respond negatively to announcements of higher rates ahead. In recessions, however, we find a strong positive reaction of stocks to seemingly similar signals of future monetary tightening. We provide evidence that the state dependence in the stock market's response is explained by information about the expected equity premium and future corporate cash flows contained in monetary policy statements. We also show state dependence in the average stock returns on days of scheduled FOMC meetings and in the impact of monetary policy statements on stock and bond return volatility.     

Stock Returns over the FOMC Cycle

We document that since 1994, the equity premium is earned entirely in weeks 0, 2, 4, and 6 in Federal Open Market Committee (FOMC) cycle time, that is, even weeks starting from the last FOMC meeting. We causally tie this fact to the Fed by studying intermeeting target changes, Fed funds futures, and internal Board of Governors meetings. The Fed has affected the stock market via unexpectedly accommodating policy, leading to large reductions in the equity premium. Evidence suggests systematic informal communication of Fed officials with the media and financial sector as a channel through which news about monetary policy has reached the market.