Congress to Launch Broad Review of U.S. Central Bank

The head of a Fed-watchdog task force in Congress is planning a broad review of the U.S. central bank, aiming to scrutinize its operations and policies. This comprehensive review, set to begin in 2019, will focus on various aspects of the Federal Reserve's (Fed) monetary policy framework, with the goal of improving its effectiveness in achieving maximum employment and price stability.



The review will consider three key components: the Fed Listens initiative, a flagship research conference, and FOMC discussions. The Fed Listens initiative will engage with diverse groups across the country, gathering feedback on the effects of the Fed's policies on various communities. The flagship research conference will bring together policymakers, academics, and researchers to discuss research central to the framework review. Finally, the FOMC will discuss topics associated with the review at five consecutive meetings, informed by analytical work from research staff across the Federal Reserve System.

One specific aspect under review is the recent decline in the neutral level of the federal funds rate. This decline increases the risk that the policy rate will fall to its effective lower bound near zero, constraining the Fed's ability to support the economy through rate reductions and increasing risks that employment and inflation will fall below levels consistent with the dual mandate goals. Addressing this issue could help the Fed better navigate future economic challenges and maintain its independence from political influence.



The review will also consider the Fed's role in promoting financial stability, particularly in light of recent events such as the 2008 financial crisis and the COVID-19 pandemic. This could involve evaluating the Fed's macroprudential policies, crisis management capabilities, communication strategies, regulatory coordination, and financial inclusion efforts.

The findings of this comprehensive review could lead to changes in the Fed's monetary policy strategy, tools, and communication practices. These changes could impact the broader economy by influencing interest rates, which affect borrowing costs on various loans. For instance, a change in the federal funds rate, the Fed's policy interest rate, can impact mortgage rates, business loans, and consumer credit, ultimately influencing economic growth, employment, and inflation.

In conclusion, the upcoming review of the Federal Reserve's monetary policy framework is set to scrutinize various aspects of the Fed's operations and policies. By addressing the recent decline in the neutral level of the federal funds rate and evaluating the Fed's role in promoting financial stability, the review could help ensure that the Fed is well-equipped to navigate future economic challenges and maintain its independence from political influence.