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Understanding Change at the Fed

Interviewee: Greg Ip, U.S. Economics Editor, Economist
Interviewer: Lee Hudson Teslik, Associate Editor, CFR.org
April 28, 2009

The U.S. Federal Reserve Board's Open Market Committee, the Fed's primary policymaking arm, meets April 28 and 29 in Washington. With short-term interest rates already near zero, however, Fed governors have lost one of their main policy levers. In this podcast, Greg Ip, U.S. economics editor at the Economist, discusses what policy options the Fed has left. Ip says "glimmers of light" in the economy probably mean that the Open Market Committee won't do anything as "creative" as it did at its March meetings, when the Fed announced it would increase government purchases of mortgage-backed securities and purchase Treasury bonds with the aim of lowering long-term interest rates. If economic conditions deteriorate, however, Ip says the Fed might well expand its purchases of mortgage-backed securities and Treasury bonds in the coming months.

Ip also discusses how the current crisis has shifted the scope of the Fed's activities and priorities more generally. He says the crisis has forced Fed governors to consider other targets than simply the U.S. inflation rate. The risk of deflation and severe infirmity in the U.S. financial system have made Fed policy "more creative and more aggressive," but also puts the institution in a position where it is "sort of picking winners and losers by delivering credit to some sectors of the economy and not others." Ip says that questions about this process could lead to demands for greater Fed oversight. He doesn't think that policymakers will seek to encroach on the Fed's independence in crafting U.S. monetary policy, but he does believe that other policy actions outside monetary policy, such as providing loans to specific sectors, will need to be justified to Congress.

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