Should the Federal Reserve conduct monetary policy using a monetary policy rule? This question, a classic one in economics, was raised again during Chair Janet Yellen’s recent Congressional testimony and has become the subject of intense debate since then. To some, the proposal to establish a rule is an attack on Fed independence, or a narrow-minded attempt to impose a straight jacket on monetary policy, but that is a caricature. Advocates of rules are not proposing rigid restrictions on Fed actions, but rather are insisting that the Fed spell out an empirically defensible framework that guides it, and explain deviations from that framework.
READ FULL ARTICLE HERE