Central Banking after the Great Recession: Lessons Learned, Challenges Ahead by David Wessel

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INTRODUCTION
DAVID WESSEL
The January 2014 inaugural event of the Hutchins Center on Fiscal and
Monetary Policy at the Brookings Institution focused on lessons that the
Federal Reserve and other central banks have—or should have—learned
from the most severe financial crisis the world economy has weathered in
seventy-five years. The session was an encouraging beginning toward our
goals of increasing public understanding of fiscal and monetary policy and
improving the quality and efficacy of those policies. As Brookings
President Strobe Talbott said in his introductory remarks:
Monetary and fiscal policies are the purview of different parts of the
federal government, but they have in common two goals: easing our
economic woes, particularly the persistence of high unemployment,
while at the same time ensuring that decisions that we make today on
spending, taxes, interest rates, and financial regulation lay the
foundations for a better life for our children and grandchildren.
That means fiscal and monetary policies need to be consistent and
compatible if we are to accelerate our recovery from the recent crisis
and ensure a healthy economic future. This is a classic challenge to the
Brookings mission, which is contributing to the improvement of our
system of governance. It's an opportunity to apply the Brookings
method which is to convene the best experts; pose the right questions;
marshal relevant facts; generate innovative, pragmatic, actionable
ideas; debate their merits in a civil, constructive, nonpartisan fashion;
engage the public, the private sector, and the policy community, and
then advocate for sound policy.
Glenn Hutchins, whose family foundation provided the gift that created
the Hutchins Center, added,
At Brookings we are uncompromising in our zeal to protect and
promote the independence of our scholars. This is because we are
committed to producing only the very highest quality, most data-

driven, most rigorous research humanly possible. And we
fundamentally believe that can only be accomplished when our
scholars are absolutely free to pursue their research to its logical
conclusion without ideological or financial fear or favor.
In that spirit, we asked John Williams, president of the Federal Reserve
Bank of San Francisco, to reflect on lessons he has gleaned from the past
five years of extraordinary, unconventional monetary policy. He said central
bankers should not assume, as they once did, that episodes in which short-

term interest rates fall to zero will be infrequent or short-lived. In his view,
the Fed's experiments with “forward guidance”—promising to keep rates
low for a long time—and with large-scale purchases of bonds and
mortgages (“quantitative easing”) have been successful, although he
acknowledged that quantifying their efficacy has proved difficult. He
highlighted three unresolved issues:
—Should central banks shift from inflation targets to price-level or
nominal GDP-level targets?
—Should large-scale asset purchases be a standard tool of monetary
policy, and if so, how should they be implemented?
—Is the 2 percent inflation target in common use by central banks high
enough?
We then turned to an occasional critic of the Fed, Martin Feldstein of
Harvard University. He broadened the discussion to inadequacy of fiscal
policy, which, he said, put too much burden on the Fed during and
immediately following the crisis. We invited Paul Tucker, now at Harvard
University after serving as deputy governor for financial stability of the
Bank of England, to identify where postcrisis reforms for the financial
system have gone far enough—and where they haven't. He had praise for
the strengthened regulation of banks but warned that too little has been
done to address risks posed by financial markets. He outlined the new
approach being followed in the United States and elsewhere to protect

Central Banking after the Great Recession: Lessons Learned, Challenges Ahead by David Wessel