Analysis & Opinions - The Wall Street Journal

New Priorities for a New Fed Regime

| Nov. 29, 2017

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.