Monetary policy has changed significantly in the last decade. How should the Fed move forward?
The promise of the central bankers to act as the caretaker of the nation’s money is a great illusion. Even more preposterous is the claim of the central bankers that they could keep the economy on the path of a low-inflation economic growth path.
The knowledge required to maintain monetary equilibrium is tacit and dispersed. No centralized monetary system, no matter how smart or well-intentioned its leaders, has access to that knowledge.
The Fed must abandon its traditional policy lever — open-market operations — in favor of managing the interest it pays on reserves if it is to hit its FFR target while operating in a floor system.
The Fed has a lot of policy tools, to be sure. But, traditionally — that is, when the Fed was operating in a corridor system — it exerted influence on the FFR primarily through its open-market operations.