Macro Musings with David Beckworth Bill Nelson on the Future of Central Bank Operating Systems
Apr 7, 2025
Bill Nelson, Chief Economist and Executive Vice President at the Bank Policy Institute, dives into the critical shifts in global central banking from supply-driven to demand-driven systems. He discusses the Fed's resistance to these changes and the implications for interest rates and liquidity management. Nelson also shares insights on the Bank of England's new framework and offers suggestions for the Fed's approach to policy implementation. The conversation highlights the dynamic landscape of central banking and the need for adaptability in an evolving economic environment.
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Shift in Central Bank Operating Systems
- Many central banks are shifting from supply-driven floor systems to demand-driven systems.
- This involves reducing reserve balances and increasing bank reliance on central bank lending.
Demand-Driven Ceiling System
- A demand-driven system, where banks borrow reserves, resembles a ceiling system.
- This differs from the U.S. system, where borrowing is seen as unusual.
Political Pressure on the Fed
- The Fed's large balance sheet may attract political pressure for non-monetary purposes.
- A floor system can create the illusion of a free lunch, which is dangerous.