Improving the Monetary System
Since 1983, the Cato Institute’s Annual Monetary Conference has brought together leading scholars and policymakers to discuss important issues in the conduct of monetary policy and steps that might be taken to improve the existing system. The conferences have also considered ideas for more fundamental reform by examining alternatives to a discretionary government fiat money regime.[1]
Karl Brunner, who participated in the first conference—The Search for Stable Money—in January 1983, was deeply concerned about the institutional uncertainty created by a lack of a transparent and enforceable monetary rule. In 1980, he advocated a strategy for monetary policy that he thought would reduce uncertainty and help promote economic stability:
We suffer neither under total ignorance nor do we enjoy full knowledge. Our life moves in a grey zone of partial knowledge and partial ignorance. More particularly, the products emerging from our professional work reveal a wide range of diffuse uncertainty about the detailed response structure of the economy.… A nonactivist [rules‐based] regime emerges under the circumstances … as the safest strategy. It does not assure us that economic fluctuations will be avoided. But it will assure us that monetary policymaking does not impose additional uncertainties … on the market place.[2]
The Fed’s Review
Nearly four decades later, and after a severe financial crisis in 2008-09, the Federal Reserve has undertaken “a broad review of the strategy, tools, and communication practices it uses to pursue the monetary policy goals established by the Congress: maximum employment and price stability.”[3] Fed Chairman Jerome H. Powell believes that, “With labor market conditions close to maximum employment and inflation near our 2 percent objective, now is a good time to take stock of how we formulate, conduct, and communicate monetary policy.”[4] The full review will appear in a report to be released by the Fed next year.
The fact that the Fed now wants “to step back and consider whether the U.S. monetary policy framework can be improved to better meet future challenges” is a good sign.[5] Cato’s Annual Monetary Conference has been doing that for 36 years, and the papers have been published in the Cato Journal. Many Fed officials, including Alan Greenspan and Ben Bernanke, have spoken at Cato’s monetary conferences. The discussion has always taken place with the hope that the policy regime could be improved—so that the market system could work more smoothly and people could enjoy a higher standard of living.
The Fed’s review takes the dual mandate as given and assumes that the 2 percent inflation target is consistent with long‐run price stability. Thus far this year, there have been a number of events hosted by Federal Reserve Banks, including a major conference at the Chicago Fed in June to “consider whether the Federal Reserve can best meet its dual‐mandate objectives with its existing monetary policy strategy, whether the existing monetary policy tools are adequate to achieve and maintain the dual mandate, and whether the communications about the policy strategy and tools can be improved.”[6]
Many of the events have taken the form of town hall meetings under a program called “Fed Listens.” The goal is to have Fed officials absorb viewpoints from many different sectors of society to make the public feel part of the process of reviewing and improving monetary policy. However, monetary policy is a complex topic, especially under the new operating system.
Cato’s Shadow Review
What is really important is for the Fed to listen to new ideas for reform that may not fit neatly within the parameters of the Fed’s review. Cato’s 37th Annual Monetary Conference—Fed Policy: A Shadow Review—will do precisely that by bringing together leading policymakers and scholars to offer constructive recommendations for improving the monetary framework. Fed Vice Chairman Richard H. Clarida, who has been instrumental in the review process, will give the keynote address, while Sir Paul Tucker, author of Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State, and a former Deputy Governor of the Bank of England, will give the luncheon address.
Keynote Speakers
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Panel topics include:
- Targets and Mandates
- The Operating Framework
- Central Banks and the Rule of Law
- Communication Practices: Transparency and Forward Guidance
- Creating an Optimal Monetary System for a Free Society
Please join our distinguished speakers on Thursday, November 14, as we shadow the Fed’s review and explore a variety of recommendations for improving our monetary system. We hope the Fed will be listening.
[1] For a history of Cato’s Annual Monetary Conference, see James A. Dorn, “History of Monetary Policy in Washington, D.C. and Its Future,” Macro Musings with David Beckworth, September 30, 2019.
[2] Karl Brunner,“The Control of Monetary Aggregates,” in Controlling Monetary Aggregates III, 61. Boston: Federal Reserve Bank of Boston, 1980.
[3] Federal Reserve Board, “Review of Monetary Policy Strategy, Tools, and Communications.” See “Overview” section. Washington: Federal Reserve Board, 2019.
[4] Jerome H. Powell, quoted in Federal Reserve Board Press Release, “Federal Reserve to Review Strategies, Tools, and Communication Practices It Uses to Pursue Its Mandate of Maximum Employment and Price Stability,” November 15, 2018.
[5] Federal Reserve Board, “Review of Monetary Policy,” Overview, p. 1.
[6] Ibid.