Mission creep at the Federal Reserve

Abstract

AbstractSince the 2008 financial crisis, the Federal Reserve has expanded its objectives beyond the traditional scope of monetary policy. It directly allocates credit, incorporates inequality considerations into its employment goals, and seems prepared to involve itself in climate change policy. In response to these developments, we make three elementary but often overlooked points. First, the Fed has engaged in mission creep since its earliest days. Second, mission creep has intensified since the financial crisis due to increases in both the supply of and demand for central bank activism. We argue that the floor system and accompanying unconventional monetary policies reduced the cost of mission creep. Third, we explain the likely negative consequences of mission creep. These have three causes: (1) mission creep increases the scope of credible commitment problems, (2) novel policies suffer from major knowledge problems, and (3) since those policies make the Fed's activities harder to monitor, it becomes costlier to discipline the central bank. The results are a greater scope for regulatory capture, bureaucratic incompetence, and rent‐seeking.