Without Rules, the Fed Rules

Source: American Institute for Economic Research
by Alexander William Salter

“On a fiat money standard, the central bank’s chief task is to define money’s purchasing power. This means creating what economists call a nominal anchor: credibly committing to markets that a variable under its control, such as the price level, will follow a predictable path. The best way to achieve this is with a monetary rule. The Fed could, for example, announce a new target for the Personal Consumption Expenditures Price Index (PCEPI), specifying its desired level (and implied growth rate) over a definite time period. The Fed hasn’t done this, of course. It doesn’t want to be bound by a rule. That would make it too easy to judge the Fed’s performance. It would also constrain the Fed in other ways, perhaps limiting forays into fashionable yet tangential topics such as employment equity or climate justice.” (09/12/23)