Document Type

Working Paper

Publication Date

2020

Center/Program

Center for Law and Economic Studies

Abstract

The Federal Reserve has long used policy frameworks to both explain and inform its policymaking. These policy frameworks typically explain what the Fed is seeking to achieve in a given domain and how it plans to achieve its desired aims. Two prominent examples are the Fed’s use of Bagehot’s dictum when acting as a lender of last resort and its monetary policy framework issued in 2012 and revised in 2020. In both instances, the framework provides a foundation for informed debate among Fed policymakers, Congress, and the public, enhancing both efficacy and accountability. Since the onset of the Covid crisis, the Fed has entered into a new domain of credit policy, but it has yet to provide a cohesive policy framework explaining what it is seeking to achieve and how it plans to accomplish given aims. This has made it far harder to assess whether the myriad new credit facilities that the Fed has created have in fact achieved desired aims and the drawbacks of those facilities. Just as importantly, it contributed to a disconnect between what Congress expected when it gave the Fed and Treasury $454 billion in the CARES Act and Fed and Treasury’s failure to use more than a fraction of those funds despite ongoing economic headwinds. Developing a cohesive framework for credit policy may not be an easy task, but the challenges embedded in the task are precisely what make it so important.

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