Subcommittee on Monetary Policy and Trade Committee on Financial Services US House of Representatives

Tuesday, March 5, 2013

Chairman Campbell, Ranking Member Clay, and other members of the Subcommittee on Monetary Policy and Trade, thank you for the opportunity to testify at this hearing on “Near- Zero Rate, Near-Zero Effect? Is ‘Unconventional’ Monetary Policy Really Working?”

As you requested, my testimony will review the conduct of monetary policy by the Federal Reserve before, during, and after the financial crisis. I will draw on my research and previous testimony.

To be complete such a review must start a decade ago with the period from 2003 to 2005 when the Fed held interest rates very low, which accentuated the housing boom, stimulated risky lending in a search for higher yields, and thereby helped bring on the bust, the defaults and the financial crisis starting in 2007. The review then continues into the financial crisis and recession from late 2007 through early 2009—a period when Fed policy performance was mixed—and concludes with the ongoing weak recovery from the recession in which the Fed’s unconventional policy has become a drag on the economy.

A defining characteristic of monetary policy during this decade has been the highly discretionary and unpredictable nature of the changes in the policy instruments, especially in contrast to the steadier rules-based policy of the 1980s and 1990s. The economic outcomes have not been good. Using the Federal Open Market Committee’s performance objective, which is “to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level,” performance has deteriorated.2 Deviations of the unemployment rate from the Fed’s assessment of the normal rate have increased substantially and inflation deviations have not improved.3 While this association of outcomes with policy changes does not alone provide evidence of cause and effect, the following testimony presents additional evidence.


Read the full transcript: hfsc-testimony-fed-policy20130305.pdf