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Without Rules, the Fed Rules
by Alexander William Salter The American Institute for Economic Research
Writing in the Wall Street Journal, Alan Blinder notes the ambiguities in Fed Chairman Jerome Powell’s recent address in Jackson Hole:
[Powell] can’t give much forward guidance when he doesn’t know what comes next. The Fed is truly data-dependent now, in a way it wasn’t a year ago, and no one knows what the next few months will bring.
Blinder’s analysis of Powell’s strategy is worth careful consideration, but even more important is the worrying truth implicit in his comment: The Fed is flying by the seat of its pants.
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.