A New Year's Resolution for the Fed

It should embrace clear monetary-policy rules and explain its reasoning for departing from them.

- Jason Furman

The Federal Reserve's decision to cut rates in December is puzzling yet also illuminating. It has given me greater appreciation for the many virtues of monetary-policy rules. I'm not ready to turn such decisions over to a computer, but the humans in charge of the central bank should be required to establish consistent operational principles and explain their reasoning when they depart from them.

At the end of 2023 the median Federal Open Market Committee member expected that 2024 would bring economic growth of 1.4%, core inflation of 2.4% and three cuts in the federal-funds rate. Instead the economy is on track for about 2.5% growth and 2.8% core inflation. With the economy much stronger than expected and inflation more persistent, the Fed should have scaled back its rate moves. Instead it cut even more than expected. Its latest forecast envisions more cuts in 2025 even though its inflation expectations are worse than they were last year.

The traditional argument against a rules-based monetary policy is that it requires Fed officials to specify too many contingencies ahead of time.

Policymakers must study dozens of indicators, talk to businesses and market participants, and take into account broader developments in the economy and world. That's true no matter the Fed's framework, and no rule would have counseled the central bank to cut interest rates to zero in March 2020 as it wisely did.