The Fed and Its Shadow: A Historical View

October 02, 2023

Charle Kahn Visiting Scholar, Research Department, Atlanta Fed and Professor Emeritus, Department of Finance and Department of Economics, University of Illinois

Stephen Quinn Texas Christian University

William Roberds Research Economist and Senior Adviser Emeritus

Summary

Central bank policies have always incorporated both a discretionary or active component and a passive component. Successful central banking has required a coordination of the two components. After a period of apparent dormancy, the passive component of monetary policy has emerged from the shadows and become relevant for Federal Reserve policy today.

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Policy Hub 2023-6

Key findings:

Central bank policies have always had both active and passive components.
Earlier generations of central banks strove for a balance between these two components.
After a period of dormancy, the passive component of monetary policy has become relevant for current policy decisions.

Center Affiliation: Center for Financial Innovation and Stability

JEL classification: E58, G23, N20

Key words: central bank, monetary policy, active, passive, repo, reverse repo

Digital Object Identifier: https://doi.org/10.29338/ph2023-6