PARTICIPANTS
Michael Boskin, Joe Grundfest, John Gunn, Simon Hilpert, Stephen Langlois, Nicholas Petrosky-Nadeau, Monika Piazzesi, Martin Schneider, Ken Scott, John Shoven, Yevgeniy Teryoshin, Emily Warren, Kevin Warsh, Ian Wright
ISSUES DISCUSSED
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, discussed and analyzed current monetary policy. Lacker highlighted key challenges facing the Federal Reserve, after which he discussed with the group different policy approaches that have been taken and are being discussed. The first of three challenges Lacker highlighted pertained to the proper tapering approach. Given the Fed stimulus program was begun under the premise of stimulating labor markets but has since been justified by stimulating growth, it was unclear what metrics were being used to determine the rate and timing of tapering. Second, knowing what quantity and quality of forward guidance to give is a challenge, since the Fed wants to both reduce uncertainty and maintain flexibility. Lastly, how, when and if the Federal Reserve should raise rates in the future is a key point of thought since the Fed wants to signal changes in policy in a manner that will not be damaging to markets. After discussing these challenges, Lacker talked with the group about how current models of the macro economy should be adjusted to incorporate both the current state of the economy (rather than just having a framework with deviations around a steady state) and other factors, including demographics and globalization. Additionally, the group discussed why the Fed does not give more forward guidance and how forward guidance is, theoretically, only effective if the Fed can commit now to what may later be suboptimal behavior (i.e. dynamic inconsistency). Lacker concluded by arguing that the Fed is being asked to regulate too many dimension of the current economic situation, by virtue of its having so many new, extraordinary tools. To solve the current banking problems we should consider the result desired and then backward induct until we know what banking structure, if implemented, will naturally result in the outcomes sought.
