Donald Kohn delivered the following remarks for the workshop, “Implementing Monetary Policy Post Crisis: What have we
learned? What do we need to know?” at Columbia SIPA and the Federal Reserve Bank of New York on May 4, 2016.
Before the global financial crisis, the implementation of monetary policy was
focused only on one thing–achieving the FOMC’s target for the federal funds rate;
and the techniques for doing so relied on very small changes in the supply of excess
reserves, which were in minimal demand by banks because they were not
remunerated. A number of developments during the crisis and the slow recovery
thereafter have substantially altered the approach to this critical objective and
opened up new potential objectives and challenges for open market operations and
the Federal Reserve’s portfolio.
The workshop dealt with these changes and their possible implications for monetary policy implementation by the Federal Reserve and other central banks. The Fed’s larger portfolio along with the expanded list of counterparties in particular has pointed to potential avenues to combine monetary policy implementation with efforts to reduce or deal with risks of financial instability. The workshop presentations had several important messages: spelling out the objectives of policy implementation carefully, especially where those objectives went beyond the traditional goal of achieving the FOMC’s policy rate objective; explaining those objectives and the use of the portfolio to the public and the Congress; dealing with governance–delineating clearly who is responsible for achieving a policy objective and how they will be held accountable; and assessing the costs and benefits of using the Fed’s portfolio as a tool to achieve a policy objective relative to other tools.