Ambiguous Economy Is the Latest Result of Fed ’s Increased Discretionary Behavior

Jai KediaRecent articles byPolitico and theWall Street Journal detail the difficult economic environment the Fed must navigate in the coming months along with highlighting the missteps the Fed has made in dealing with post ‐​Covid inflation. The articles show that in response to inflation, the Fed executed its steepest and fastest series of rate hikes in 40 years. Once again, this has raised several questions into the internal workings of the Fed and the general obscurity with which it has been conducting monetar y policy. While the Fed’s recent performance has garnered significantmedia attention, as mynew Cato working paper shows, this failure is only the latest episode in a  long‐​term trend of discretionary behavior dating back to 2009.From the mid ‐​1980s through to the mid‐​2000s, Fed policy was generally considered to be good.Academics andFed officials alike credited good monetary policy with keeping the economy stable during this period (often called the “Great Moderation”). In my working paper, I show that the Fed was much more likely to follow a rules‐​based approach during this period as compared to after the financial crisis. In fact, every successive Fed chair since Paul Volcker has deviated further from the rules‐​based policymak ing that helped the Fed be successful in the first place. Just one fact from the paper: the correlation between the good policy rule of the Fed and their actual policy fell from 75% under Bernanke, to 17...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs