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What Might a GDP-Targeted Monetary Policy Look Like?

Federal Reserve Bank of ClevelandThere has been much speculation regarding the future of the Federal Reserve and the Federal Open Market Committee (FOMC) lately—and these questions are widely known amongst the mortgage and banking industries—will FOMC Chair Janet Yellen serve another term, when will the Fed once again raise interest rates to facilitate its goal of reducing its balance sheet?

But a new Bloomberg Opt Ed proposes a different question: what if new and inevitable changes to the FOMC result in a change in monetary policy that favors gross domestic product rather than inflation and unemployment rates?

When Federal Reserve Vice Chair Stanley Fischer announced his pending resignation in October, more than eight months prior than when his term was set to end, he left four of the seven seats on the board vacant. And although Randal Quarles, a former banking executive, was confirmed by a Senate Banking Committee vote of 17-6, his position still awaits a full Senate vote, which has not yet been scheduled.

These factors, combined with current Fed Chair Janet Yellen’s term expiring in February of 2018, leave open the opportunity for big changes in the Fed and its current stance on monetary policy.

So, how would monetary policy change if focus is shifted towards GDP? According to the author:

First, the Fed would have to address remittances to the Treasury Department and the interest it pays to banks on excess reserves. The Fed currently transfers the interest income from the government securities it has purchased through open market operations to the Treasury.

Another suggestion would be:

The Fed credit the Treasury’s account at the central bank with reserves instead of remitting it back the interest the central bank receives from its bond holdings. In return, the Treasury would pledge Treasury bills as collateral, allowing it to spend the reserves any way it sees fit. The Fed and Treasury could strike a new “accord” whereby reserves from the banking system fund public-private partnerships for infrastructure spending. With tax reform and deregulation, a business-friendly environment could generate the needed investment and boost productivity.

Of course, all of this depends on the outlook of Yellen’s replacement, who, by all intents in purposes, could be appointed to a second term. As Bloomberg reports, a total of six people have found themselves in the public eye to fill the Yellen’s chair at the end of her term, each with their own economic theories.



About Author: Joey Pizzolato

Joey Pizzolato is the Online Editor of DS News and MReport. He is a graduate of Spalding University, where he holds a holds an MFA in Writing as well as DePaul University, where he received a B.A. in English. His fiction and nonfiction have been published in a variety of print and online journals and magazines. To contact Pizzolato, email [email protected].

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