Now that we have demonstrated that we have monetary control even with a very large balance sheet, I would hope that this issue has been put to rest. As I noted earlier, I am a committed advocate for enhanced transparency and we are always looking for ways to improve. But, of course, there are limits. One could argue, for example, that a live broadcast of a Federal Open Market Committee meeting would be more transparent. But, such a broadcast would do considerable harm by constraining candor and debate over the appropriate monetary policy decision. I believe it would likely lead to less informed decisions and, consequently, poorer execution of our monetary policy responsibilities. Similarly, disclosing in real time who was borrowing from the Federal Reserve’s Discount Window would likely undercut the efficacy of the window. Banks might be reluctant to borrow if it were immediately made public because such borrowing might be construed in the market as a sign of weakness. 19 Stigmatizing Discount Window use by banks would make this tool less effective as a lender of last resort backstop for bank liquidity needs. While there obviously is a point of diminishing returns in terms of increased transparency, I think it’s reasonable to evaluate what further steps the Federal Reserve could make in this direction, judging whether additional steps would enhance versus diminish the effectiveness of our tools and policies, and our ability to achieve our objectives.
But this is mainly because more monetary policy stimulus has been required during the current economic cycle in order to push the U.S. economy towards the Fed’s dual mandate objectives. I believe that if we had not responded as forcefully, the recovery would have been slower, the unemployment rate would have been higher and there would have been a greater risk of deflation. While it is much too soon to claim success, the U.S. economy today is in a relatively good place compared to most other countries. The economic expansion is in its seventh year and we have made considerable progress relative to our employment and inflation objectives. Also, the tools that we designed to control monetary policy even with a very large balance sheet have been shown to be effective. In December, when we raised our target range for the federal funds rate to 25 to 50 basis points, we also raised the interest rate we pay on bank reserves to 50 basis points and the rate we pay on our overnight reverse repo facility to 25 basis points. Not only have these new tools been effective in moving the federal funds rate up into the middle of its new target range, but the entire complex of money market rates has moved up as well. Also, the fears expressed by some that the Federal Reserve’s very large balance sheet would lead to runaway inflation have proven to be unwarranted.