Three challenges to central bank orthodoxy

Abstract

Since 2007-09, the Federal Reserve has pursued a very aggressive monetary policy strategy. This strategy has been associated with healthy labor market conditions, moderate economic growth, and inflation—netting out the effects of a major oil price shock—that is close to the Federal Open Market Committee’s (FOMC’s) 2 percent target. Thus, with the economy returning to normal, it is natural for the FOMC to begin the process of exiting its highly accommodative policy. The FOMC has laid out several well-defined steps for this process. This strategy may be called central bank orthodoxy, since it is a natural extension of the classical view. However, three challenges to this orthodoxy have developed. Although each challenge is interesting and potentially helpful, the orthodox view provides a better basis for devising near- and medium-term monetary policy decisions. (JEL E52, E58, E63, E65).