Editor's Note.

• Author: Dorn, J.A.

In November 2018, Fed Chairman Jerome H. Powell announced that, "With labor market conditions close to maximum employment and inflation near our 2 percent objective, now is a good time to take stock of how we formulate, conduct, and communicate monetary policy." Consequently, in 2019, the Fed undertook "a broad review of the strategy, tools, and communication practices it uses to pursue the monetary policy goals established by the Congress: maximum employment and price stability." The Federal Reserve Board, in its "Review of Monetary Policy," stated: It was time "to step back and consider whether the U.S. monetary policy framework can be improved to better meet future challenges." During 2019, the Fed held many events to achieve that goal, including a Fed Listens program, to allow the broader pubic to offer comments, and a major policy conference hosted by the Federal Reserve Bank of Chicago in June. A full report of the Fed's review is slated to appear this year.

The Fed's review takes the dual mandate as given and assumes that a long-run inflation rate of 2 percent is consistent with price stability. It also limits the range of allowable policy options in other ways. It sets aside alternatives to its present means for implementing monetary policy, including alternative means for conducting open-market operations. It also fails to consider the adoption of a rules-based monetary regime that limits Fed power and discretion, which grew considerably in response to the 2007-2009 global financial crisis.

Unconventional monetary policies--notably, large-scale asset purchases (also known as quantitative easing or QE)--gave the Fed a sizable footprint in credit markets, especially the mortgage market. Moreover, under Section 13 (3) of the Federal Reserve Act, the Fed used its emergency lending authority to set up a number of special purpose vehicles as off-balance sheet entities. The Fed also implemented a new operating system--the so-called floor system--in which the Federal Open Market Committee (FOMC) implements a target range for its policy rate using the interest rate on excess reserves (set by the Board of Governors) and the rate on overnight reverse repos. The use of interest on excess reserves to encourage member banks to hold large balances at the Fed has decimated the federal funds market while severing the long-standing connection between the stance of monetary policy and the size of the Fed's balance sheet.

It is fitting that the Fed...