Analysis & Opinions - The Wall Street Journal
New Priorities for a New Fed Regime
Now is a good time for those who hope to see new thinking at the Federal Reserve. There will soon be a new Fed chairman and vice chairman. The president of the Federal Reserve Bank of New York, who serves as vice chairman of the Federal Open Market Committee, will also be replaced in the coming months. And a majority of the Fed’s Board of Governors will be new next year. What should this leadership emphasize?
Financial stability must become one of the leading objectives of monetary policy. The Fed now uses monetary policy to achieve its congressionally mandated goals of price stability and maximum employment. Although it relies on regulation and supervision to reduce the risks to the banking sector, the broader risks to the financial sector reflect the effects of monetary policy on asset prices.
The Fed has kept the short-term federal-funds interest rate at less than the rate of inflation for nearly a decade. Meantime, it has exploded its balance sheet, to $4.5 trillion today from $870 billion in 2007. Low interest rates have caused investors and lenders to reach for yield, pushing up asset prices and making high-risk investments and loans.
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For Academic Citation:
Feldstein, Martin.“New Priorities for a New Fed Regime.” The Wall Street Journal, November 29, 2017.
The Author
Martin Feldstein
- Member of the Board, Belfer Center for Science and International Affairs
- George F. Baker Professor of Economics at Harvard University
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Now is a good time for those who hope to see new thinking at the Federal Reserve. There will soon be a new Fed chairman and vice chairman. The president of the Federal Reserve Bank of New York, who serves as vice chairman of the Federal Open Market Committee, will also be replaced in the coming months. And a majority of the Fed’s Board of Governors will be new next year. What should this leadership emphasize?
Financial stability must become one of the leading objectives of monetary policy. The Fed now uses monetary policy to achieve its congressionally mandated goals of price stability and maximum employment. Although it relies on regulation and supervision to reduce the risks to the banking sector, the broader risks to the financial sector reflect the effects of monetary policy on asset prices.
The Fed has kept the short-term federal-funds interest rate at less than the rate of inflation for nearly a decade. Meantime, it has exploded its balance sheet, to $4.5 trillion today from $870 billion in 2007. Low interest rates have caused investors and lenders to reach for yield, pushing up asset prices and making high-risk investments and loans.
Want to Read More?
The full text of this publication is available via the original publication source.The Author
Martin Feldstein
- Member of the Board, Belfer Center for Science and International Affairs
- George F. Baker Professor of Economics at Harvard University
- Recommended
- In the Spotlight
- Most Viewed
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Cutting U.S. Corporate Tax is Worth the Cost
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