How much can the Federal Reserve keep buying, and to what extent can it expand its balance sheet? Moreover, what are the limits of monetary policy? At an AEI event on Thursday, financial experts joined AEI's Alex Pollock to discuss the pending challenges facing the next Fed chair. Peter Fisher of BlackRock Investment Institute highlighted that Federal Open Market Committee members do not agree on what forward guidance means. Consequently, he urged the Fed to clarify its theory of expectations.
AEI's John Makin argued that markets and policymakers have placed the Fed on an unrealistic pedestal, expecting it to do more than it can. He said that while the Fed's emergency actions during the financial crisis bolstered the economy, the Fed faces a difficult task in maintaining a low and stable rate of inflation while remembering that it cannot affect unemployment.
AEI's Stephen Oliner posed a dilemma: if the economy remains sluggish despite the Fed's optimistic forecast, how long will the Fed continue to expand its balance sheet and how will it extend forward guidance in the future? Conversely, what if the economy fares better than forecasted and the inflation rate increases? Oliner argued that Fed guidance should not rely excessively on fallible forecasts.
Live blog from the event
President Obama will soon nominate the next chair of the Federal Reserve Board of Governors, coming at a time when the Fed balance sheet has inflated to the unprecedented size of $3.6 trillion, including $1.3 trillion in mortgages. Since the financial crisis, the Fed has been following an aggressive "easy money" strategy, including buying $85 billion of bonds and mortgages each month and keeping real short-term interest rates negative. What’s next? Can the Fed stop now?
At this event, Fed policy experts will discuss the leadership challenges facing the next Fed chair, including continuing or ending quantitative easing, dealing with systemic risk, addressing the effects of the Fed’s actions on other countries, and meeting the Fed's statutory mandates for stable prices, employment, and moderate long-term interest rates.
If you are unable to attend, we welcome you to watch the event live on this page. Full video will be posted within 24 hours.
Learn more about the 3 challenges awaiting the next Federal Reserve chair: