26/6/2019 Crafting monetary policy for the 21st century economy | TheHill

Crafting monetary policy for th

century economy
BY SCOTT SUMNER, OPINION CONTRIBUTOR — 06/21/19 03:30 PM EDT
THE VIEWS EXPRESSED BY CONTRIBUTORS ARE THEIR OWN AND NOT THE VIEW OF THE HILL

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In the 21st century, central banks face a challenge that few economists

Poll: Biden leads predicted: how to conduct monetary policy when interest rates fall to
Democratic ield by 6 zero. In early June, the Federal Reserve held a conference in Chicago
points, Warren in called “Fed Listens” to look at ideas for reforming monetary policy, with a
second place
special focus on the zero-rate problem. 
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While economists have long understood that zero interest rates create
problems for monetary policy, this situation had not occurred since the
Great Depression of the 1930s, before unexpectedly re-occurring during
the Great Recession and its aftermath. 

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Cutting interest rates has been the Fed’s most widely utilized method for
providing stimulus during recessions. Because holding assets in cash
always pays zero interest, however, it has traditionally been assumed that
the Fed was unable to reduce market interest rates signi icantly below
zero.
Admittedly, some countries have recently achieved very slightly negative
interest rates, taking advantage of the fact that inancial institutions are
uncomfortable holding large sums of cash and will therefore pay a small
price for the privilege of storing funds in safe government bonds. But the
Fed seems uninterested in adopting that controversial policy. 
Once interest rates hit zero during the deep recession of 2009, the Fed
began experimenting with other approaches, such as quantitative easing

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(QE) — buying up assets to inject money into the economy. This policy
had some success in promoting recovery, but not as much as the Fed
would have liked. Thus, the search for more options began. 
Some economists have suggested raising the in lation target from 2
percent to 3 or 4 percent. The motivation is to keep interest rates above
zero, since higher in lation rates generally lead to higher market interest
rates, as we saw in the 1970s. However, the Fed views that idea as
inconsistent with its congressional mandate of stable prices and high
employment.
Now, the Fed seems to be considering less-controversial policies that
would deliver some of the same bene its when we need them the most.
One option discussed at the conference was “price-level targeting” —
holding the long-run in lation target at 2 percent per year and then
promising to return to that trend line whenever there are temporary
undershoots or overshoots.
Thus, a year of 3-percent in lation might be followed by a year of 1-
percent, and vice versa. The goal is to make longer-run changes in the
price level predictable.
This policy would be especially helpful when the Fed is unable to cut
interest rates below zero, also known as the “zero-bound problem.” This
problem tends to occur during recessions, when interest rates fall to zero
and in lation also declines.
With in lation temporarily below target, price-level targeting would allow
the Fed to commit to the aforementioned period of offsetting, above-
normal in lation, which in turn makes a more aggressive QE policy more
acceptable during recessions.
In normal circumstances, the Fed loses credibility with inancial markets
when a policy like QE overshoots the 2-percent in lation target, and this
reduces the effectiveness of monetary policy. With price-level targeting,
market participants would understand that during a recession, below-
target in lation today will be followed by somewhat-higher-than-normal
in lation in the future.
Higher in lation expectations create a more expansionary monetary policy
by lowering real interest rates. If nominal interest rates are at 2 percent
and the expected in lation rate rises to 3 percent, then the real cost of the
loan falls to -1 percent.
Thus, when rates are stuck at low levels, the expectation of higher prices
(and home values) in the future makes irms and homebuyers more willing
to borrow money today. 
You might be wondering if the Fed could use elements of this stimulative
policy without formally adopting price-level targeting. Perhaps, but Fed
o icials prefer to have a clear and transparent policy target that is
understandable to the public. A rules-based approach makes policy more
credible, which helps to ensure it has the intended impact. 
The conference also considered a closely related option called “average
in lation targeting,” which would target the average in lation rate over an
extensive period of time, say 5-10 years.
Many Fed o icials prefer this option because it sounds closer to the
existing policy than does price-level targeting. Both allow for the make-up
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26/6/2019 Crafting monetary policy for the 21st century economy | TheHill

of in lation undershoots, and thus have some of the same advantages. 

Look for an intensive discussion of average in lation targeting early next

year when the Fed considers revising its policy strategy.

Scott Sumner is an emeritus professor of economics at Bentley University

and the Ralph G. Hawtrey chair of Monetary Policy at the Mercatus Center
at George Mason University.

TAGS ECONOMY MONETARY POLICY MACROECONOMICS INFLATION TARGETING INFLATION

QUANTITATIVE EASING INTEREST RATE

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Amash splits with Republicans

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BY OLIVIA BEAVERS - 06/26/19 12:45 PM EDT

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GOP Rep. Justin Amash (Mich.) broke with House Republicans on
Wednesday by voting to authorize a subpoena for Kellyanne Conway
, saying lawmakers should hear from the White House counselor about her
response to allegations that she repeatedly violated the Hatch Act.
The House Oversight and Reform Committee voted 25-16 to compel
Conway's testimony after she did not appear voluntarily at a hearing
focused on her repeated alleged violations of the law, which bars federal
o icials from using their position to in luence elections.
Amash was the only Republican to join Democrats in voting to approve the
subpoena. The Michigan Republican, a vocal critic of President Trump,

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had drawn the ire of the White House last month after calling for the
president's impeachment.
"With respect to the vote, the point is not whether she is violating the
Hatch Act or not, it is whether she should comply with the subpoena,"
Amash told reporters leaving the committee room.
"But we should have brought her in and had an opportunity to ask her
about the Hatch Act and to make her case for why she thinks she is
complying with it," he added.
Earlier this month, the O ice of Special Counsel (OSC) sent a report
to President Trump that said Conway repeatedly violated the Hatch Act by
discussing Democratic presidential candidates while appearing as a White
House o icial for television interviews.
And when Democrats sought to hear from the top staffer, the White
House intervened, blocking Conway from appearing for public
testimony on Wednesday and citing a "long-standing precedent" in which
presidential administrations decline requests to have presidential advisers
give congressional testimony.
The vote to issue a subpoena for Conway came after roughly 30
minutes of arguments over the validity of OSC indings and amid a
broader battle between the White House and House Democrats, who are
conducting sprawling oversight investigations into the administration.
Amash has repeatedly split with the GOP on various issues and last month
he also doubled down on his claim that Trump should be impeached for
obstruction of justice, after he read special counsel Robert Mueller's
report.
The OSC and Mueller's o ice are separate.
Amash's outspokenness has stunned party leaders and stoked the ire of
the president, who hit back by calling him a "loser."
While leaving the committee room on Wednesday, Amash also broadly hit
both parties for taking a different stance when they are in the minority.
"I think both parties when they get into the minority take a different
position. It is pretty typical of Washington to have double standards. I
don't say it is one party. I think all parties do that," Amash said.
TAGS KELLYANNE CONWAY ROBERT MUELLER DONALD TRUMP JUSTIN AMASH
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