Stanford conference urges more rules and policies for central banking

Stanford scholars at a Hoover Institution conference suggest that central bankers' decisions should be based on clearly understood rules and not only on discretion. The conference's mission was to generate a strong argument that the Federal Reserve should follow traditional policies and rules as the debate grows on its future role in the U.S. economic recovery.

Scholars and economists gathered at Stanford's Hoover Institution last week to examine the future of central banking – and whether it needs more guidance and structure. The collective answer: "Yes."

John LeSchofsJohn Taylor

Stanford economist John Taylor hosted a Hoover Institution conference on central banking tied to the centennial of the Federal Reserve.

More than 100 people attended the two-day conference, including four presidents of Federal Reserve branches, along with professors, economists, researchers, students and media.

Conference host and Stanford economist John Taylor has long advocated for setting parameters for Federal Reserve policymakers as they set short-term interest rates. Dubbed the "Taylor Rule," this approach suggests that the Fed increase interest rates in times of high inflation, or when employment is above the full employment levels, and decrease interest rates in the opposite situations. The Taylor Rule was widely hailed at the conference as a sensible approach to monetary policy.

One counterargument to this is that the historic economic slump of 2008 called for unprecedented policy steps from the Fed, such as "quantitative easing," an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy appears ineffective.

Looking ahead

In his opening remarks, Taylor spoke of "rule-like" and "systemic" guidelines for the Federal Reserve, which is celebrating its centennial this year. It seemed an appropriate time, Taylor noted, to hold a forward-looking conference, titled "Frameworks for Central Banking in the Next Century."

"This was kind of a niche that other centennial conferences did not focus on," said Taylor, the George P. Shultz Senior Fellow in Economics at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University. Taylor is also a senior fellow at the Stanford Institute for Economic Policy Research.

Nine panel discussions took place on the theme of how central bankers' decisions could best be based on clearly-understood rules – such as legal limits, institutional structures, mandates, traditions, procedures and formulas – and not solely on discretion.

Draft research papers by scholars across the country were presented and discussed. They included titles such as "Monetary Policy with Interest on Reserves," "Deviations from Rules-Based Policy and Their Effects," "Lessons from a Century of Fed Policy," "Federal Reserve Independence," "Monetary Policy in the Midst of Big Shocks," "The Design and Communication of Systematic Monetary Policy Strategies," "Rules for a Lender of Last Resort" and "Monetary Policy in Open Economies." (Links for all the research papers, the agenda and additional information can be found on the conference's web page.)

In the first panel discussion, John Cochrane, an economist from the University of Chicago, analyzed the Federal Reserve's practice of buying trillions in assets and additional reserves through its quantitative easing programs. He suggested that the Fed paying interest on those reserves is appropriate for the economy.

"A huge balance sheet, with reserves that pay market interest, is a very desirable configuration of monetary affairs," Cochrane wrote in his paper.

In a Thursday evening speech, Esther George, the president of the Kansas City Fed, said that financial institutions were pursuing risky strategies during this time of low interest rates. She suggested moving away from the Fed's current low rate policies and pushing up rates sooner rather than later.

The other Fed presidents in attendance were Charles Plosser of the Philadelphia Fed, Jeff Lacker of the Richmond Fed and John Williams of the San Francisco Fed.

The Hoover conference drew deep interest from business and financial media. About two-dozen members of print and broadcast media attended, including staff from the New York Times, Washington Post, Reuters, Bloomberg, CNBC, The Economist and Investor's Business Daily.