News Reporter: Wonkbook: The Fed shouldn't expect people to trust its current approach to the economy -- by Larry Summers

Monday 29 August 2016

Wonkbook: The Fed shouldn't expect people to trust its current approach to the economy -- by Larry Summers

The latest economic and domestic policy from Wonkblog

Stanley Fischer, vice chairman of the U.S. Federal Reserve, left, and Janet Yellen, chair of the U.S. Federal Reserve, right, speak outside of the Jackson Lake Lodge during the Jackson Hole economic symposium, sponsored by the Federal Reserve Bank of Kansas City, in Moran, Wyoming, U.S., on Friday, Aug. 26, 2016. Federal Reserve Chair Janet Yellen said the case to raise interest rates is getting stronger as the U.S. economy approaches the central bank's goals. Photographer: David Paul Morris/Bloomberg

Stanley Fischer, vice chairman of the Federal Reserve, left, and Janet Yellen, chair, talk in Moran, Wyo. on Friday. (David Paul Morris/Bloomberg)

By Lawrence H. Summers

I had high hopes for the Federal Reserve's annual conference in Jackson Hole, Wyo. The conference was billed as a forum that would look at new approaches to the conduct of monetary policy — something that I have been urging as necessary, given secular stagnation risks and the sharp decline in the apparent neutral rate of interest. And Chair Janet Yellen's speech in a relatively academic setting provided an opportunity to signal that the Fed recognized that new realities required new approaches.

The Federal Reserve system and its chair are to be applauded for welcoming challengers and critics into their midst. The willingness of many senior officials to meet with the "Fed Up" group is also encouraging. And it's important for critics like me to remember that the policy explorations of today often become the conventional wisdom of tomorrow. In this regard, the fact that the Fed has now recognized that the decline in the neutral rate is much more than a temporary reflection of the financial crisis is a very positive sign.

On balance, though, I am disappointed by what came out of Jackson Hole judging by news reports, as I was not there. First, the near term policy signals were on the tightening side, which I think will end up hurting the Fed's credibility and the economy. Second, the longer term discussion revealed what I regard as dangerous complacency about the efficacy of the existing toolbox. Third, there was failure to seriously consider major changes in the current monetary policy framework.

Read the rest on Wonkblog.

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