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Fed Committee considers changing the rules of monetary policy

Published: Monday, Oct. 8 2012 9:56 p.m. MDT

In this April 17, 2009 file photo, Federal Reserve Board Chairman Ben Bernanke speaks at the Federal Reserve Sixth Biennial Community Affairs Research Conference in Washington.

Associated Press

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Sometimes when the outcome of a contest appears to be heading in a direction other than that desired, changing the rules of the contest may be a reasonable solution. In the recently released minutes from the Federal Open Market Committee's last meeting, the current policy of keeping short-term interest rates at the current very low levels for a specified period of time was questioned by the Committee members.

Many of the Fed Committee members expressed interest in establishing certain economic triggers the Committee would consider in making future changes to monetary policy. Given the Fed's dual mandate to keep inflation under control and support full employment, the potential triggers the Fed might consider would likely involve these two aspects of the dual mandate.

On the inflation front, the Committee has expressed its desire to keep long-term, overall US inflation at 2 percent or less. In the notes from the last Fed meeting, the Committee members stated an expectation of inflation running at or below this target level.

With current US unemployment still stubbornly stuck at over 8 percent, a potential trigger the Fed Committee might consider could be an unemployment level of 7 percent or less. Measuring unemployment might prove to be a challenging variable for the Fed. It has been observed in some recent unemployment measures that workforce participation has declined. This means some people have given up on finding employment and are no longer counted as part of the unemployed. While this is not the only factor potentially distorting the unemployment rate, it does indicate one challenge of using a stated economic figure as a trigger for future Fed actions.

Fed Committee Chairman, Ben Bernanke, has stated one of his objectives as Chairman is to facilitate greater transparency about Committee objectives and actions. Changing from the current calendar based trigger for managing interest rates to a policy based on the observed US economic activity would change the dynamics of the Fed's actions. Generally, the capital markets prefer certainty and clarity over ambiguity and obscurity. A well-executed shift in the rules governing Fed actions would likely receive a positive response from the markets.

Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.

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