Seven Papers That May Shape How the Fed Sets Monetary Policy
The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

Seven Papers That May Shape How the Fed Sets Monetary Policy

(Bloomberg) -- Federal Reserve officials gathering in Chicago to review how they manage the world’s largest economy will have much to chew over.

Seven pieces of academic research are being published and presented at the two-day conference Tuesday and Wednesday.

Here’s a rundown of what each says:

It concludes that the current way of setting monetary policy played an “important role in supporting” the recovery from the last recession and that the weakness of the rebound is down to longer term forces such as the slowing growth of the labor force. The potency of policy would have been greater had the Fed had higher interest and inflation rates at the time of the slump, it said.

How Tight is the Labor Market?
By Katharine Abraham and John Haltiwanger

It crafts a measure of labor market tightness based on the ratio of effective vacancies to effective searchers. It suggests the “U.S. labor market was considerably less tight at the end of 2018 than implied by the standard ratio of vacancies to unemployment.” It argues
“the unemployment rate and the unemployment gap are not sufficient statistics for assessing the state of the labor market.”

The former chief economist of the International Monetary Fund explores the avenues in which the global economy impinges on the policy environment faced by the Fed, potentially complicating its job. He says more policy tools such as macro-prudential regulation or more cooperation among international central banks would help. Obstfeld adds there remains “fundamental uncertainty” toward the U.S. inflation process.

Improving U.S. Monetary Policy Communications
By Stephen Cecchetti and Kermit Schoenholtz

The Fed’s publishing of vast amounts of inflation has helped improve U.S. economic performance in recent decades, the paper says. Further improvements could be made by simplifying public statements, clarifying how policy will react to changing conditions and highlighting areas of uncertainty and risk. It proposes Fed officials publish a simpler statement after their policy meetings and introduce a concise overview of the inflation outlook.

The former Swedish central banker endorses an average inflation target. He argues such an approach would help mitigate some of the problems the Fed faces in a low interest rate, low inflation world. Under such a target, the central bank would aim to hit its price goal on average over a period of time. “Average inflation targeting has some advantages,’’ says Svensson.

The paper finds that despite its usefulness, quantitative easing does not come without cost. The large balance sheet that results from the buying of assets such as bonds has consequences for the efficacy of low interest rates as well as the ability of central banks to normalize monetary policy, the authors argue.

The Fed has “strong incentives” to ensure that financial risks are identified and addressed, the authors write. That means the U.S. Congress should evaluate the effectiveness of post-crisis regulatory reforms, including whether authorities have enough flexibility to reach to new vulnerabilities, it says.

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