An Operating Framework for the 21st Century

Abstract

This paper makes the case that there is an urgent need to upgrade the Federal Reserve’s operating framework to handle the realities of the 21st century. To do this, the Fed needs to make several important changes. First, it needs to adjust its operating framework so that it is robust to both positive and negative interest rate environments. Second, the Fed needs to tie its operating framework to a level target so that it can do meaningful forward guidance. Finally, the operating framework needs the enhanced credibility that comes by providing the Fed explicit but constrained access to a standing fiscal facility at the zero lower bound. This paper outlines a proposal that accomplishes this goal and does so in a manner that would encourage the Fed to act in a more systematic, rules-based, and accountable manner.