{
  "id": "RL31050",
  "type": "CRS Report",
  "typeId": "REPORTS",
  "number": "RL31050",
  "active": false,
  "source": "EveryCRSReport.com",
  "versions": [
    {
      "source": "EveryCRSReport.com",
      "id": 100472,
      "date": "2001-07-19",
      "retrieved": "2016-05-24T20:22:23.409941",
      "title": "Formulation of Monetary Policy by the Federal Reserve: Rules vs. Discretion",
      "summary": "Would the economy be better off if the responsibility for setting the federal funds rate were taken\nfrom Federal Reserve (Fed) Chairman Alan Greenspan and his colleagues on the Federal Open\nMarket Committee (FOMC) and replaced by a simple rule? A surprising number of economists\nwould answer yes. John Taylor, now an Undersecretary of the Treasury, formulated what is now\ncalled the \"Taylor rule\" in which interest rate changes would automatically be based on gaps between\ninflation and growth and their desired or sustainable long-run rates. \n Some Members of Congress have expressed a dissatisfaction with the Fed's use of discretion,\nand have sought alternative policy options; rules offer one alternative. Although day-to-day control\nof monetary policy has been delegated to the Fed, the ultimate goals are determined by Congress. \nThus, Congress retains the right to change the current personal, discretionary regime to a monetary\npolicy based on a formula incorporated in a rule.\n Proponents of using a rule such as the Taylor rule argue that basing policy on explicit,\nquantitative goals would promote economic efficiency and individual decision making because it\nwould eliminate monetary policy \"surprises\" inherent in the informal discretionary process now in\nplace. Rule proponents point to the 1970s when they believe poorly executed discretionary policy\nled to double-digit inflation despite sluggish economic growth. They attribute this to the Fed's\nunwillingness to accept slower short-term growth for the sake of price stability and to resist \"fine-\ntuning\" policy in the pursuit of unrealistic goals. The steps ultimately taken to regain control over\nthe resulting inflation caused the worst recession since the Great Depression. It is argued that if the\nFed's credibility had not been so low by this point, inflation could have been eliminated with a much\nmilder recession. \n Under a rule, necessary but politically unpopular decisions would be automatic - inflation could\nno longer drift upward in pursuit of temporary employment gains. Switching to a rule could reduce\nuncertainty, enhance credibility and accountability, and improve monetary policy effectiveness. To\nthose who see the current regime as undemocratic, rules offer a way to limit the discretionary power\nof the unelected FOMC.\n Defenders of discretionary policymaking argue that setting monetary policy in a highly complex\neconomy cannot be reduced to a single equation. They point out that this is especially true at times\nof financial crisis, when the Fed's ability to increase financial liquidity is instrumental for quelling\npanic. Discretionary policy may have been executed poorly in the 1970s, but the 1990s economy\nhas enjoyed low inflation and high, stable economic growth. They also question the real-world\nusefulness of the simple models that rule proponents use to demonstrate the superiority of Taylor\nrules. There are a number of practical problems that would arise if a Taylor rule were implemented. \nThese include lags in the effectiveness of monetary policy, shortcomings with economic data, and\nuncertainty about key economic variables such as the natural growth rate.  There are no plans\nto\nupdate this report .",
      "type": "CRS Report",
      "typeId": "REPORTS",
      "active": false,
      "formats": [
        {
          "format": "PDF",
          "encoding": null,
          "url": "http://www.crs.gov/Reports/pdf/RL31050",
          "sha1": "3c3f1d6e82979bca316331b9b6e3032a23a49903",
          "filename": "files/20010719_RL31050_3c3f1d6e82979bca316331b9b6e3032a23a49903.pdf",
          "images": null
        },
        {
          "format": "HTML",
          "filename": "files/20010719_RL31050_3c3f1d6e82979bca316331b9b6e3032a23a49903.html"
        }
      ],
      "topics": []
    }
  ],
  "topics": [
    "Economic Policy"
  ]
}