The Federal Reserve's Abandonment of its 1923 Principles

Abstract

This paper studies the persistence and some of the consequences of the eventual abandonment by the FOMC of the principles embedded in the Federal Reserve's Tenth Annual Report of 1923. The three principles I focus on are 1) the discouraging of speculative lending by commercial banks, 2) the desire to meet the credit needs of business and 3) the preference of a focus on credit over a focus on monetary aggregates. I show that the first two principles remained important in FOMC deliberations until the mid-1960's. After this, the FOMC also spent less time discussing the composition of bank loans. Abstract: This paper studies the persistence and some of the consequences of the eventual abandonment by the FOMC of the principles embedded in the Federal Reserve's Tenth Annual Report of 1923. The three principles I focus on are 1) the discouraging of speculative lending by commercial banks, 2) the desire to meet the credit needs of business and 3) the preference of a focus on credit over a focus on monetary aggregates. I show that the first two principles remained important in FOMC deliberations until the mid-1960's. After this, the FOMC also spent less time discussing the composition of bank loans.One of the most dramatic reversals in Federal Reserve policymaking involves the targeting of

Unconventional monetary policy reaction functions: evidence from the US

“…In this sense, our results shed some light on the design of unconventional monetary rules with the goal of promoting growth and medium-term price stability. Given the lack of evidence of a systematic response of monetary policy to asset price growth, our findings seem to be in line with the authors claiming that considerations about asset price bubbles aimed at dampening financial sector pro-cyclicality and minimizing the macroeconomic costs of systemic crisis episodes should be part of the policy toolkit of specialized macro-prudential regulators, not the monetary authority (Rotemberg, 2014;Allen, 2015;Kenç, 2016;Łupiński, 2018;.…”

Divisions of regulatory labor, institutional closure, and structural secrecy in new regulatory states: The case of neglected liquidity risks in market‐based banking

“…Historically, the Fed had regulated banking and credit by influencing available reserves and money market conditions. But this integrated approach to monetary and financial policy was suspended in the 1960s (Mehrling 2011;Rotemberg 2014). Subsequently, monetary and capital markets research was divided into two separate divisions during Greenspan's tenure (Axilrod 2009, p. 133).…”

How does monetary policy respond to the dynamics of the shadow banking sector?

“…Therefore, considerations about asset price bubbles, financial fragility, and too rapid or imprudent credit growth, among others, to specifically limit the procyclicality of the financial system, target systemic risk, and mitigate its macroeconomic costs would be part of the macroprudential policy toolkit (Borio, ; Łupiński, ; Papademos, ). Despite this, a number of challenges remain unsolved including (a) how regulatory policies may themselves fail to account for continuous changes in the financial system accruing to globalization, preferences, and technology shifts (Claessens, ; Reinhart & Sowerbutts, ); (b) whether responsibility for macroprudential policies should be pursued by specialized prudential regulators and supervisors or monetary authorities (Allen, ; Ingves, ; Kenç, ; Rotemberg, ); (c) how to coordinate and calibrate monetary policy and macroprudential policies (Turner, ); (d) the complacency about bond market liquidity “illusion,” the rigidity of bank liquidity rules and the virtual absence of macroprudential tools targeting the nonbank system (Turner, ). Summing up, there is neither consensus, nor a unified institutional supervision framework for the financial system (Barwell, ).…”