Legislating Policy Rules Hurts in Times of Crisis

May 1, 2015

Orange, CA — Legislating that a central bank follow a strict set of operational mandates restricts its freedom to react in crises and limits “the discretionary decision making” of the Fed, said one of its top officials on Friday.

Speaking at Chapman University in Orange, California, John C. Williams, CEO and president of the Federal Reserve Bank of San Francisco, addressed legislative proposals seeking to mandate that Fed decisions follow pre-set policy rules. While those rules have proven an “invaluable tool for research and practical policy considerations at central banks,” Williams said that the Fed’s flexibility would be constrained by their legislatively mandated use, particularly in unpredictable economic circumstances and crises.

Describing what he called “the independence dilemma,” Williams laid out the two approaches to central banks’ independence. He juxtaposed the old models of “operational mandates,” which assign a rule for central banks to follow and restrict their flexibility—such as the gold standard and fixed exchange rates—and “goal mandates,” which require meeting overall economic goals, such as the Fed’s dual mandate of maximum employment and price stability. Operational mandates had ultimately failed, he said, while goal mandates—the model under which the Fed has operated since the Federal Reserve Reform Act of 1977—have proven much more successful.


Matthew Schiffgens
Federal Reserve Bank of San Francisco
(415) 974-3246


The Federal Reserve Bank of San Francisco (SF Fed) serves the public by promoting a healthy, sustainable economy, and supporting the nation’s financial and payment systems. With offices in Los Angeles, Seattle, Salt Lake City, Portland and Phoenix, the Bank serves the Twelfth Federal Reserve District, which includes one-fifth of the nation’s population and represents the world’s fourth-largest economy. As part of the nation’s central bank, the SF Fed informs monetary policy, regulates banks, administers certain consumer protection laws and acts as a financial partner to the U.S. government.