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November 21, 2013

Limiting the Fed

In a provocative speech this week, Charles I. Plosser, the president of the Federal Reserve Bank of Philadelphia, proposed a new approach for the Federal Reserve System. The Fed, he said, should focus only on controlling inflation, strictly limit the assets it buys, follow a more rules-based approach to setting interest rates and place binding constraints on its emergency lending activities.

Of course, this is not so much a new set of ideas as an attempt to return to a much more traditional perspective on how the Fed should operate – not back to the pre-1930s gold standard, but perhaps back to the early days of Fed independence in the 1950s.

Mr. Plosser is concerned about the recent expansion of the central banking mandate and activities. He is right to want to shift norms around what the Fed does, but unfortunately his proposals in this speech underplay the Fed’s responsibility for the nation’s recent economic crisis, as well as what has happened to the financial system in recent decades.”

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Read Simon Johnson’s full New York Times column post here

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