Tags: IMF | Lagarde | policy | Fed

Fed Chair Yellen Speaks at IMF — Part II

By    |   Wednesday, 09 July 2014 07:37 AM

Before Federal Reserve Chair Janet Yellen spoke at the International Monetary Fund (IMF) in Washington on July 2, IMF Managing Director Christine Lagarde delivered remarks that set forth two goals of the lecture series: 1) to reflect on the current crisis and what we have learned from it, and 2) to build stronger bridges for those "preoccupied with central banking," which includes, but goes beyond, central bankers.

Referring to the "recent" crisis, Lagarde referred to it as an "earthquake" that has shaken the financial system, "swaying many of our assumptions and traditional policy prescriptions." She went on to suggest, "It has changed the policy landscape, diverted streams," and she took the analogy far enough to envision central bankers learning to depart from the view of the policy landscape as practically flat and learning to see themselves as mountaineers.

For her, "Central banking has suddenly become a very exciting sport." She credited central bankers for attracting a dedicated audience "because of their role in fighting the crisis and returning us to stability." She asserted that this role would continue, "because it will not be business as it was."

The bridge-building activities she referred to include re-examining the monetary policy advice that institutions provide, and she hastened to say that the knowledge of the issues "does not reside in a single institution." The lecture series is intended to be a "pillar" on which the bridges will be built.

Lagarde proceeded to list three questions on the future of monetary policy:
  • Given that price stability doesn't always ensure economic stability, should central banks put more weight on growth and employment? Should central bank mandates be enlarged to cover not just price stability, but also financial stability? What role should monetary policy play in preserving financial stability, and how do you make sure that central bank independence regarding monetary policy is preserved?
  • Given the interconnections among economies, many emerging countries have found it difficult to deal with large swings in capital flows, asset prices and exchange rates. How can these economies retain monetary policy independence in such a policy setting, and what tools should they use?
  • While there has been much progress in the advent of a broad global effort to reform the regulatory framework, much remains to be done. How will financial regulations and the new structures of the financial system affect the functioning of monetary policy domestically and abroad?
In conclusion, Lagarde acknowledged that people in the audience undoubtedly have answers to some of the questions she posed. This writer would observe that the Fed has already decided that with the enactment of Dodd-Frank, its role has been enlarged to encompass financial stability. It may also have grown far beyond its statutory bounds to arrogate the power to administer serial ad hoc bailouts of markets and banks as it arbitrarily picks winners and losers based on client interests.

One would hope that as the hundredth anniversary of the establishment of the Fed in the name of managing financial panics is marked, if not celebrated, the Fed's role and policies will truly be critically reexamined rather than to assume that the Fed's mandate is to conduct business as usual on an even more ambitious scale.

(Archived video can be found here.)

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Before Federal Reserve Chair Janet Yellen spoke at the International Monetary Fund (IMF) in Washington, IMF Managing Director Christine Lagarde delivered remarks that set forth two goals of the lecture series.
IMF, Lagarde, policy, Fed
Wednesday, 09 July 2014 07:37 AM
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