Here is guest post I wrote on the Fed’s open-market operations authority for Confessions of a Supply-Side Liberal, a blog on financial economics (and other subjects) run by University of Michigan economist Miles Kimball:
This is the second guest post by Greg Shill, a lawyer and fellow at NYU School of Law, on the legal scope of the Fed’s powers in the area of unconventional monetary policy. His work focuses on financial regulation, corporate law, contracts, and cross-border transactions and disputes, and his most recent article, “Boilerplate Shock: Sovereign Debt Contracts as Incubators of Systemic Risk,” examines the role of financial contracts in the Eurozone sovereign debt crisis. (His first guest post was “So What Are the Federal Reserve’s Legal Constraints, Anyway?”)
As a longtime follower of Miles’ work, it’s an honor and privilege to write for his blog and to put my ideas in front of his diverse and sophisticated audience. So, thank you, Miles, and your devoted readers.
For the past several years, the Federal Reserve has used many levers to stabilize and stimulate the economy. One of its most controversial has been the use of so-called unconventional monetary policy, chiefly three rounds ofquantitative easing (or QE, beautifully explained in this clip) from 2008 to 2014. Although the wisdom of these policies has been widely debated, the Fed’s legal range of action largely has not. In fact, as I have notedpreviously, policymakers and observers have been remarkably quiet about the scope of the Fed’s legal authority to conduct unconventional policy, and when they do describe it they often offer timid visions of the Fed’s powers.
Economists and other observers have often urged the Fed to do more to juice a recovery that was, until recently, broadly disappointing. These proposals have included not only calls to cut interest rates and launch quantitative easing in the first place (both of which the Fed did), but to target higher inflation, introduce electronic money, conduct direct monetary transfers to the public, extend QE beyond its wind-down in October 2014, and expand the range of assets eligible for purchase under QE. The Fed of course did none of those more ambitious things, and today, with QE finished and policy normalizing, defining the legal limits on the Fed’s monetary policy arsenal may feel less urgent. Yet it is a startlingly important question to leave open, given persistent overall weakness in the global economy today combined with the strong likelihood that the Fed will need to consider aggressive and creative measures in the future.
The general question is: in a future recession or crisis, does the Fed have the tools it needs to go beyond what it’s done in the past? This is one of the most important open legal questions in public policy today…