Stanley Fischer: Monetary policy - by rule, by committee, or by
both?
Speech by Mr Stanley Fischer, Vice Chair of the Board of Governors of the Federal Reserve
System, at the 2017 US Monetary Policy Forum, sponsored by the Initiative on Global Markets at
the University of Chicago Booth School of Business, New York City, 3 March 2017.
* * *
In recent years, reforms in the monetary policy decisionmaking process in central banks have
been in the direction of an increasing number of monetary policy committees and fewer single
1
decisionmakers - the lone governor model. We are only a few months away from the 20th
anniversary of the introduction of the Bank of England's Monetary Policy Committee, just a few
years after the 300th birthday of the venerable Old Lady of Threadneedle Street. The Bank of
Israel moved from a single policymaker to a monetary policy committee in 2010, while I was
governor there; more recently, central banks in India and New Zealand have handed over
monetary policy to committees.
The Federal Reserve is not part of this recent shift, however. The Federal Open Market
Committee (FOMC) has been responsible for monetary policy decisions in the United States
since it was established by the Banking Act of 1935, two decades after the founding of the Fed
2
itself.
The movement toward committees reflects the advantages of committees in aggregating a wide
range of information, perspectives, and models. Despite the prevalence and importance of
committees in modern central banking, the role of committees in the formulation of policy has not
3
attracted nearly as much academic attention as has the research on monetary policy rules.
The literature on monetary policy rules stretches back to at least Adam Smith and includes
important contributions from David Ricardo, Knut Wicksell, and Milton Friedman.More recently,
John Taylor has moved the research agenda forward with his eponymous rule, and a large
number of academic papers have been written examining the effectiveness and robustness of
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policy rules. In contrast, as noted, study of the role of committees in making monetary policy
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has been fairly light, notwithstanding the insightful work of Alan Blinder and others.
Committees and rules may appear to be in opposition as approaches to policymaking. One
might even argue that if a central bank ever converged on a single monetary rule, there would be
no need for a monetary policy committee. In practice, the Fed operates through a committee
structure and considers the recommendations of a variety of monetary rules as we make
monetary policy decisions. Our decision is typically whether to raise or reduce the federal funds
rate or to leave it unchanged. Committees can aggregate large amounts of diverse information-
not just data, but also anecdotes and impressions that would be hard to quantify numerically.
Good committees also offer a variety of perspectives and underlying economic models for
interpreting the economy. In contrast, a policy rule, strictly defined, is numerical and constrained
to a single perspective on the economy.
Committees and rules each have their advantages. Committees embody a wider range of
information and have a capacity for innovation. Rules can simplify central bank communications,
a particularly important feature in forward-looking models of the economy. In contrast, the
diversity of views that makes a committee work can sometimes pose a communications
challenge, as the frequent complaints about the cacophony of messages coming out of the
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FOMC illustrate.
In the remainder of my discussion, I would like to elaborate on some of the features of
committees that have contributed to their prevalence in monetary policymaking. I will then
discuss monetary policy rules and some of the difficulties in developing robust rules for policy.
Why Do Almost All Central Banks Make Their Monetary Policy Decisions in a Committee?
Let us turn to central bank decisionmaking. One of the striking facts about the Fed is that it is the
third central bank of the United States. Whereas the long-lived central banks of Europe - the
Riksbank and the Bank of England - have survived for more than three centuries, the Fed has
only recently become a centenarian.
Roger Lowenstein's book America's Bank convinces the reader that it was no easy matter to
establish this third central bank. It also establishes for those coming to the issue for the first time
that the major issues related to the Fed's structure were political. That is, underlying the
disagreements about the establishment of the Federal Reserve was the concern that the central
bank not upset the balance of economic power within the U.S. economy. Indeed, it was not until
1935 that the present structure of the FOMC was established, in which the 7 members of the
Federal Reserve Board in Washington, D.C., who are nominated by the President and confirmed
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by the Senate, vote along with 5 of the 12 Reserve Bank presidents at any given meeting.
So, why policy committees? What makes them so special? There are several reasons to prefer
decisionmaking by committee: For one thing, each committee member brings to the table his or
her own perspective or view of the world, as well as valuable information that others on the
committee haven't heard. Moreover, committees are less likely to take extreme positions -
discussion, deliberation, and voting tends to drive policy outcomes toward compromise.
Committees also tend to be less volatile or activist, imparting an inertia to policymaking that could
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be desirable - or perhaps undesirable when activism is required. Finally, academic studies
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have shown that a combination of forecasts is more accurate, over time, than a single forecast.
Putting it all together, committees are, on average, likely to make better monetary policy
decisions than individuals - an assertion that has received support from academic experiments
in which undergraduate students played a part.
Notwithstanding the shift toward monetary policy committees, each central bank and its
institutional structure reflects the politics and culture of the country that it serves (or "countries" in
the case of the European Central Bank). The Federal Reserve is no exception, as Lowenstein's
book demonstrates. In the years before 1913, the United States suffered through a series of
financial crises culminating in the Panic of 1907. That panic convinced many important
stakeholders - William Jennings Bryan, the leader of the Populist movement; Paul Warburg, a
prominent financier; Nelson Aldrich, a powerful Republican senator; and Carter Glass, the
Democratic chair of the House Committee on Banking and Currency - that America needed a
central bank. Our unique structure with the Board of Governors in Washington and the 12
Reserve Banks scattered around the country reflected a years-long struggle to balance a variety
of competing interests: farmers in the heartlands and financiers on Wall Street; populists and
federalists; and creditors and debtors. Our central bank and its policy committee importantly
reflect the deal the Fed's founders struck to resolve those competing interests and create an
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institution representing America's economic and geographic diversity.
I should add that I find the regional balance created by the membership of the FOMC to be a
valuable feature of its structure. In the first round of policymaker discussion at a typical FOMC
meeting, most of the presidents of the Reserve Banks start their presentations with a description
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of economic developments in their Federal Reserve District. From these presentations, one
understands what a massive and diverse economy the United States is and why the politicians
who established the Fed were right to require its decisions to be made by a committee.
Robust Rules for Monetary Policy
I turn now to economic models and monetary policy rules. I recently gave a lecture at the
University of Warwick entitled "I'd Rather Have Bob Solow Than an Econometric Model, But . . . ,"
with the punch line quote from Paul Samuelson saved for the end: "I'd rather have Bob Solow
than an econometric model, but I would rather have Bob Solow with an econometric model than
12
without one." To summarize, the speech discussed the important role that models and policy
rules play in FOMC discussions and decisionmaking.
Shortly after the speech, I received an e-mail from an old and esteemed colleague, Professor
Athanasios Orphanides, with the subject line "I'd rather have Bob Solow with a model and a rule
(following a careful evaluation process)." What does a careful evaluation process entail? I will
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paraphrase my correspondent at length.
Professor Orphanides's recommendation is that the FOMC adopt a reference rule, based on a
rigorous evaluation and paying particular emphasis to (1) robustness to model uncertainty, (2)
robustness to natural rate uncertainty, (3) robustness to expectations formation, (4) robustness
to the size of shocks and the effective lower bound, and (5) whatever else the Fed staff has
identified as a gap in our knowledge that may matter in evaluation. He suggested that, ultimately,
the FOMC could arrive at a simple rule that would serve as a good benchmark to guide policy.
My colleague certainly lays out an impressive work program for the Board's cadre of Ph.D.
economists. However, I tend to agree with John Taylor and my Fed colleague John Williams
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when they write that "the search for better and more robust policy rules is never done."
My take is that rules are extremely useful reference tools, but they are likely to work best as
inputs into a committee decision. Why? Let me reiterate some points I made in Warwick. First,
the economy is very complex, and models that attempt to approximate that complexity can
sometimes let us down. A particular difficulty is that expectations of the future play a critical role
in determining how the economy reacts to a policy change. Moreover, the economy changes
over time- this means that policymakers need to be able to adapt their models promptly and
accurately in real time. And, finally, no one model or policy rule can capture the varied
experiences and views brought to policymaking by a committee. All of these factors and more
recommend against accepting the prescriptions of any one model, policy rule, or policymaker.
References
Blinder, Alan S. (1998). Central Banking in Theory and Practice. Cambridge, Mass.: MIT Press.
---- (2004). The Quiet Revolution: Central Banking Goes Modern. New Haven, Conn.: Yale
University Press.
Blinder, Alan S., and John Morgan (2005). "Are Two Heads Better Than One? Monetary Policy by
Committee," Journal of Money, Credit, and Banking, vol. 37 (October), pp. 789-811.
Bordo, Michael D. (2016). "Some Historical Reflections on the Governance of the Federal
Reserve," in John H. Cochrane and John B. Taylor, eds., Central Bank Governance and
Oversight Reform. Stanford, Calif.: Hoover Institution Press.
Chappell, Henry W. Jr, Rob Roy McGregor, and Todd Vermilyea (2005). Committee Decisions
on Monetary Policy: Evidence from Historical Records of the Federal Open Market
Committee. Cambridge, Mass.: MIT Press.
Faust, Jon (2016). "Oh, What a Tangled Web We Weave: Monetary Policy Transparency in
Divisive Times," paper prepared for "Understanding Fedspeak," an event cosponsored by the
Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution and the Center for
Financial Economics at Johns Hopkins University, held at the Brookings Institution, Washington,
November 30, available at
www.brookings.edu/research/oh-what-a-tangled-web-we-weavemonetary-policy-transparency-in-divisive-times.
Fischer, Stanley (2017). "I'd Rather Have Bob Solow Than an Econometric Model, But . . . ,"
speech delivered at the Warwick Economics Summit, Coventry, United Kingdom, February 11.
Gerlach-Kristen, Petra (2004). "Is the MPC's Voting Record Informative about Future UK
Monetary Policy?" Scandinavian Journal of Economics, vol. 106 (June), pp. 299-313.
Hendry, David F., and Michael P. Clements (2004). "Pooling of Forecasts," Econometrics
Journal, vol. 7 (1), pp. 1-31.
Lombardelli, Clare, James Proudman, and James Talbot (2005). "Committees versus
Individuals: An Experimental Analysis of Monetary Policy Decision Making," International Journal
of Central Banking, vol. 1 (May), pp. 181-205.
Lowenstein, Roger (2015). America's Bank: The Epic Struggle to Create the Federal Reserve.
New York: Penguin Press.
Meade, Ellen E., and David Stasavage (2008). "Publicity of Debate and the Incentive to Dissent:
Evidence from the US Federal Reserve," Economic Journal, vol. 118 (April), pp. 695 717.
Orphanides, Athanasios, and John C. Williams (2002). "Robust Monetary Policy Rules with
Unknown Natural Rates," Brookings Papers on Economic Activity, no. 2, pp. 63-118.
Powell, Jerome H. (2016). "A View from the Fed," speech delivered at "Understanding
Fedspeak," an event cosponsored by the Hutchins Center on Fiscal and Monetary Policy at the
Brookings Institution and the Center for Financial Economics at Johns Hopkins University, held at
the Brookings Institution, Washington, November 30.
Ruge-Murcia, Francisco, and Alessandro Riboni (2010). "Monetary Policy by Committee:
Consensus, Chairman Dominance, or Simple Majority?" Quarterly Journal of Economics, vol.
125 (February), pp. 363-416.
---- (forthcoming). "Collective versus Individual Decision-Making: A Case Study of the Bank
of Israel Law," European Economic Review.
Taylor, John B. (1979). "Estimation and Control of a Macroeconomic Model with Rational
Expectations," Econometrica, vol. 47 (September), pp. 1267-86.
---- (1993). "Discretion versus Policy Rules in Practice," Carnegie-Rochester Conference
Series on Public Policy, vol. 39 (December), pp. 195-214.
---- (1999). Monetary Policy Rules. Chicago: University of Chicago Press.
Taylor, John B., and John C. Williams (2011). "Simple and Robust Rules for Monetary Policy," in
Benjamin M. Friedman and Michael Woodford, eds., Handbook of Monetary Economics, vol. 3B.
Amsterdam: North-Holland, pp. 829-59.
Walsh, Carl E. (2009). "Using Monetary Policy to Stabilize Economic Activity (PDF)," speech
delivered at a symposium sponsored by the Federal Reserve Bank of Kansas City, held in
Jackson Hole, Wyo., August 20-22, pp. 245-96.
Warsh, Kevin M. (2016). "Institutional Design: Deliberations, Decisions, and Committee
Dynamics," in John H. Cochrane and John B. Taylor, eds., Central Bank Governance and
Oversight Reform. Stanford, Calif.: Hoover Institution Press.
Wheelock, David C. (2000). "National Monetary Policy by Regional Design: The Evolving Role of
the Federal Reserve Banks in Federal Reserve System Policy," in Jürgen von Hagen and
Christopher J. Waller, eds., Regional Aspects of Monetary Policy in Europe. Boston: Kluwer
Academic, pp. 241-74.
Williams, John C. (2003). "Simple Rules for Monetary Policy (PDF)," Federal Reserve Bank of
San Francisco, Economic Review, pp. 1-12.
1
I am grateful to Joseph Gruber and Ellen Meade of the Federal Reserve Board for their assistance. The views
expressed are mine and not necessarily those of the Federal Reserve Board or the Federal Open Market
Committee.
2
Although the Federal Reserve was created in 1913, the institutional structure and governance that we have today
date from 1935. See Bordo (2016) and Wheelock (2000).
3
It is true, though, that popular books on prominent central banks typically relate more frequently to the
outstanding governors or presidents of the central banks than they do to the organizational structure of those
banks.
4
See Taylor (1979), Taylor (1993), Taylor (1999). A few other notable papers from the vast literature on monetary
policy rules include Orphanides and Williams (2002), Walsh (2009), and Williams (2003).
5
See Blinder (1998) and Blinder (2004). Other important contributions to the literature on monetary policy
committees include Blinder and Morgan (2005); Chappell, McGregor, and Vermilyea (2005); Gerlach-Kristin
(2004); Meade and Stasavage (2008); Ruge-Murcia and Riboni (2010); and Warsh (2016).
6
For a discussion of the cacophony issue, see Faust (2016) and Powell (2016).
7
The president of the Federal Reserve Bank of New York is a permanent member of the FOMC. Four votes rotate
annually among the remaining 11 Reserve Bank presidents.
8
In an experimental study in which undergraduates played a monetary policy game by themselves and in groups
of five, Lombardelli, Proudman, and Talbot (2005) found group decisions to be more inertial than individual
decisions but closer to that of a policy rule, although Blinder and Morgan (2005) found that groups were no
different from individuals in terms of policy activism. A recent study by Ruge-Murcia and Riboni (forthcoming) of
Bank of Israel policy before and after its change from a single governor to a committee found that committee
decisions were more inertial than individual ones.
9
See, for example, Hendry and Clements (2004).
10
In addition, in more recent times, the Federal Reserve System has placed greater emphasis on other aspects of
diversity.
11
While only a subset of Reserve Bank presidents vote at any given FOMC meeting, all of them offer their views in
our discussions of the economy and of monetary policy.
12
See Fischer (2017).
13
The direct quotation from Professor Orphanides is as follows: "My recommendation had been that the FOMC
should adopt a reference rule, based on rigorous evaluation, using the technology the Fed staff has developed
over the past couple of decades and paying particular emphasis on various aspects of robustness: (1)
robustness to model uncertainty, (FRB/US (various vintages), EDO, SIGMA (again various vintages) and others),
(2) robustness to natural rate uncertainty, u*, r*, Q*, fx* and so on, (3) robustness to expectations formation
(mode consistent, learning, partial learning by businesses/households, etc.), (4) robustness to the size of
shocks and the ZLB [zero lower bound] (given that certainty equivalence does not hold), (5) whatever else the
staff research has identified as a gap in our knowledge that may matter in evaluation. The evaluation should
allow for forecast-based rules as well as outcome-based rules and could be updated on an annual basis to
incorporate new information. But ultimately, the FOMC could arrive at a simple rule that would be, in the
Committee's judgment, a good benchmark to guide policy."
14
See Taylor and Williams (2011), p. 855.