M-RCBG Senior Fellow-Led Study Group: Jeff Fuhrer

Friday, November 13, 12:00-1:00pm
Zoom meeting. Registration:  https://harvard.zoom.us/meeting/register/tJUqc-2vqzwoG9YFUJp65KoUXsj5zdEZkggp

The Fed’s Monetary Policy Framework Evaluation in the wake of COVID-19: New Framework Elements, and ad hoc Fiscal-Monetary Coordination

    In the fall of 2018, the Fed embarked on a process to conduct a systematic review of its monetary policy framework (MPF). Initiated by Chair Powell and headed up by Vice-Chair Clarida, the process was meant to evaluate the current MPF—the tools, strategies and communications by which the Fed aims to achieve its Congressionally-mandated goals—and consider whether any systematic changes might be beneficial. 1 

The review was prompted by the joint challenges of:

•    Low equilibrium interest rates, which imply more frequent trips to the effective lower bound; 
•    Inflation that has been chronically below the Fed’s two percent objective; 
•    A slip in long-run inflation expectations, likely related to the prolonged history of below-2% inflation; 
•    A very low response of inflation to economic activity (a “flat Phillips curve”) that in turn implies a low response of inflation to monetary policy actions; and 
•    A concern that these environmental challenges jointly put both inflation and unemployment goals at risk going forward. 

The central question of the review was whether alternative policies such as “make-up” policies—loosely, policies that try to achieve an inflation rate that averages two percent, rather than just attain two percent without regard to inflation’s history above or below two—could help the Fed to effectively stabilize the economy, keeping it closer to full employment, and centering inflation more consistently on the 2% objective. 

The advent of the novel Coronavirus, the public health restrictions that have been required to slow its spread, and the consequent sharp and rapid decline in economic activity have brought the concerns raised in the Framework Review into even sharper relief. The economic crisis prompted the Fed to take a number of extraordinary actions—purchasing securities in the corporate bond, municipal bond, and private nonfinancial debt markets—in a way that it had not previously. It did so with the backing of the US Treasury, which shields the Fed from some of the losses it might incur by taking on such credit risk. But it also raises the question of the acceptable degree of collaboration between the monetary and fiscal authorities in the U.S. Because interest rates and inflation are likely to remain low for the foreseeable future, the Fed may be called upon regularly to use such new tools, and the debate over fiscal-monetary interactions will likely continue.

On August 27, 2020, the Fed officially concluded its MPF, releasing the new Consensus Statement on Longer-Run Goals and Monetary Policy Strategy—the official document that defines the key elements of its MPF.2  Two key changes in the MPF are:

1.    “In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” 
2.    “In setting monetary policy, the Committee seeks over time to mitigate shortfalls of employment from the Committee's assessment of its maximum level and deviations of inflation from its longer-run goal.” 

This study group will examine the import of the Fed’s policy changes, the ongoing debate about fiscal/monetary interactions, and more generally the challenge of stabilizing the economy in a low-interest rate, low-inflation environment. 

 1 In the interest of full disclosure, I was a member of the staff steering committee that guided the staff work that supported the MPF review until February of 2020.
 2 The new consensus statement may be found here https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm . This link provides a very helpful guide to the changes made to the statement, which are discussed

Jeff Fuhrer headshot in front of colorful "Rise" and "Fall" paintings by Michael MazurJeffrey (Jeff) Fuhrer was Executive Vice President and Senior Policy Advisor at the Federal Reserve Bank of Boston until stepping down at the start of 2020. He oversaw and then served as an advisor to the Bank’s regional and community outreach department and was responsible for the Bank’s diversity and inclusion functions. He has been an associate economist of the Federal Open Market Committee, and regularly attended this key U.S. policymaking meeting with the Bank’s president. In June 1992 he joined the Bank’s research department as an assistant vice president and economist, and from 1995–2001 headed its Open Economy Macro/International section. In 2000 Fuhrer was named senior vice president and monetary policy advisor, in 2001 he became director of research, and in 2006 he was named executive vice president.  Fuhrer began his career at the Board of Governors of the Federal Reserve System, first as a research assistant, and then in 1985 returned as a senior economist after earning his doctorate. He has been active in economic research for more than three decades and has served as an associate editor for the American Economic Review. Fuhrer has published numerous scholarly papers on the interactions among monetary policy, inflation, consumer spending, and asset prices. He has been married for 39 years and has three grown children. Fuhrer earned an A.B. in economics with highest honors from Princeton University, and received his M.A. and Ph.D. in economics from Harvard University. While at HKS, Jeff Fuhrer will pursue a research project, Issues in Monetary Policy Framework Design. His faculty sponsor is Karen Dynan, Professor of the Practice in the Department of Economics at the Harvard Faculty of Arts and Sciences. His email is:  jeffrey_fuhrer@hks.harvard.edu