Tags: Volcker | Fed | price | stability

Volcker: Fed's Only Rule Should Be Price Stability

By    |   Friday, 19 September 2014 09:52 AM

There has been much talk in financial circles recently that the Federal Reserve should adopt a "rules-based" policy, which would require the central bank to determine its policy in a formulaic manner based on certain economic statistics.

Former Fed Chairman Paul Volcker apparently doesn't think much of the idea. Dallas Fed President Richard Fisher asked Volcker for his opinion at an economic conference Thursday.

The 87-year-old's response: "The only rule I like is that the Fed is supposed to maintain price stability," The Dallas Morning News reports.

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The Fed has taken a lot of heat lately for its massive easing program. But Volcker, who served as chairman from 1979 to 1987, still holds the institution dear.

"I consider myself the Joe Louis of the Federal Reserve, always defending himself," Volcker notes, referring to the champion boxer of the 1930s and 1940s. "The Federal Reserve maintains a respect and independence that is very unique."

To be sure, public opinion of the Fed has slipped, acknowledges Volcker, who was appointed by President Carter and also served under President Reagan.

"I have to admit if you took a survey, that opinion is not as strongly felt today as 10 years ago because of the [financial] crisis," he states. "Banking and financial systems must be part of monetary policy. If you have a broken financial system, you're not going to have a sensible monetary policy."

Volcker, who is credited with breaking the back of double-digit inflation that plagued the country early in his tenure, has called for another Bretton Woods system, the 1945-71 monetary structure that pegged the dollar and other currencies to gold.

"When you look back at the most recent crisis, a lot went wrong," Volcker argues. "The market itself went wild. Perhaps the Federal Reserve was not quite as disciplined as it might have been. It was the lack of discipline in markets that led to financial disaster."

Our financial system needs to right itself, he insists. "Today, we're missing two things: a sense of discipline in the nation's financial system and an interest rate adjustment. We need an institutional structure that can provide warning signals when needed."

Political paralysis is making it difficult to implement financial reform, Volcker maintains. "I think it's fair to say the United States government is not operating at maximum efficiency today."

Meanwhile, Harvard economist Martin Feldstein, who was chairman of Reagan's Council of Economic Advisers, say that though the Fed was cautious in its policy statement Wednesday about committing itself to any date for raising interest rates, it will clearly act next year.

"They are communicating to the market that 2015 is going to see a significant increase in short rates. I suspect longer rates as well," he tells CNBC.

"So while they haven't put a date on when they are going to start, it seems to me a little less important than the fact they are telling us by the end of [2015] the fed funds rate will probably be in the 1.25 to 1.50 percent range."

The Fed has kept its fed funds target rate at a record low of zero to 0.25 percent since December 2008.

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Finance
There has been much talk in financial circles recently that the Federal Reserve should adopt a "rules-based" policy, which would require the central bank to determine its policy in a formulaic manner based on certain economic statistics.
Volcker, Fed, price, stability
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2014-52-19
Friday, 19 September 2014 09:52 AM
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