Federal Reserve Precedent
posted by Gerard Magliocca
Respect for precedent is a useful way of limiting the power of an independent institution like the Federal Reserve. Furthermore, courts and central banks share a desire for stable policy to anchor expectations (about the rule of law and prices) while retaining the flexibility to adapt to new conditions. This leads to an obvious question. If courts find common-law stare decisis helpful, why not central banks?
In this respect, a recent change at the Federal Reserve may be far-reaching. Until the 2000s, the Federal Open Market Committee (FOMC) did not offer any explanation for its monetary decisions. Under Chairman Bernanke, however, the FOMC began issuing a written statement after each meeting justifying its action (or inaction). Every so often there is a “dissent” from the opinion, though the dissent is usually fairly brief.
At what point will the FOMC or dissenting bankers start citing these prior statements as some kind of authority? Put another way, how does a system of precedent develop organically? Initially, the relevant work product is descriptive. The English Year Books, which first reported the pleadings under the writ system in medieval days, began as a description of how cases were decided. Lawyers and judges later started looking at these reports for guidance (how long that process took–I don’t know). The same could eventually happen for central banks.
I would submit that this would be a positive development, as it would take monetary policy more towards a “rule of law” rather than a “rule of men,” without going to the extreme of the gold standard, which was too inflexible back in the day. But that gets close to falling outside of my limited area of competence.
One more post coming about how the Fed became independent, and then I’m done with this topic.