A New Direction for the Federal Reserve: Expanding the Monetary Policy Toolkit

November 30, 2017

Despite record corporate profits and high stock prices, most Americans have not shared in the post-recession recovery. In this Roosevelt Institute report, Mike Konczal and J.W. Mason discuss how the Great Recession changed the way the Federal Reserve (the Fed) uses macroeconomic monetary policy—a set of rules influencing the supply of credit and the rate of growth of the overall economy—to promote more robust and equitable economic growth.

A New Direction for the Federal Reserve: Expanding the Monetary Policy Toolkit, builds on previous research showing that the U.S. economy has not recovered from the Great Recession, with low labor force participation and stagnant wages as evidence of an incomplete recovery. Turning to what—at the time—was viewed as unconventional monetary policy, the Fed’s actions to weather the financial crisis triggered considerable debate in the field of monetary economics. In the new report, the authors argue that it is essential for the Fed to further expand its scope and develop an even broader monetary policy toolkit than was employed during the Great Recession. They suggest six approaches they believe the Federal Reserve—and Congress—should adopt:

  • Setting long-term interest rates
  • Increasing support for public borrowing
  • Purchasing state and local debt
  • Coordinating Treasury and Federal Reserve policy
  • Purchasing a greater range of private debt
  • Shifting from a monetary policy to a credit policy framework

As this new paper discusses, the economy’s ability to weather recessions, and to meet basic human needs even in good times, depends on the Fed thinking more broadly about its role to manage the economy and weather economic crises. The Federal Reserve may be uncomfortable redefining its role in the macroeconomy, but whether it likes it or not, the central bank is a key planner that can shape the character and the level of economic activity in the U.S. According to Konczal and Mason, the Fed should embrace this role—and the democratic accountability that goes with it—and exercise its power to advance the public good.