Structural changes of the Federal Reserve are rare events. The last big one occurred in 1933 when the Federal Open Market Committee (FOMC) was established. Following the stagflationary environment of the 1970s, Congress altered the Fed's mandate to the current one that is typically referred to as the dual mandate of price stability and full employment.
Since the zero bound for the Fed funds target rate was reached in December 2008, and followed by a series of quantitative easing (QE), the realization that the tools available to the Fed are no longer adequate for it to be able to achieve its legislative mandate has given rise to the understanding of and quest for a new mandate for the Federal Reserve.
The nature of how that mandate would change and what tools would be authorized by Congress for the Fed to use independently of political oversight once the legislation was passed focused on macroprudential regulations.
The Economist magazine produced an excellent brief last summer on what macroprudential regulation is, so I won't go into it here other than to observe that it would require affording the Federal Reserve the ability to target specific sectors of the economy with policies rather than just the overall financial system.
The date of the article is important because it aligns closely with the speech made by Federal Reserve Vice Chairman Stanley Fischer last August in Sweden in which he discussed the fact that the global economy had undergone a structural change in the post-Lehman era that warranted the introduction and implementation of macroprudential tools for monetary policy.
The first issue to note about this is that Fischer was brought into the Federal Reserve as the vice chair specifically to pursue the macroprudential policies necessary for the Fed to be able to achieve its mandate because he had done so while he was the governor of the Bank of Israel.
Within a month of Fischer giving that speech, a new committee was set up at the Federal Reserve to be chaired by him called the Committee on Financial Stability, described at the time as "The Fed's Plunge Protection Team."
The pursuit of financial stability has effectively become the Fed's third mandate, albeit without legislative approval at this point.
Last December, the committee issued its first and only communique to date, in which it outlined its agenda.
Anyone interested in figuring out what the path for monetary policy will be, other than the inane and ubiquitous debate about rate increases, must be aware of this committee and its agenda.
The best way to think of the operation of the Federal Reserve System right now is as an organization in transition, with Chair Janet Yellen in charge of the day-to-day functions and representing continuity with the past, with Fischer establishing the rules and procedures to be followed in the future and submitting to Congress any necessary regulatory changes.
The importance of this is that although the Fed has some authority within its existing legislative mandate to enact macroprudential policies, others will require congressional authority and the principal regulated organizations, the banks, are actively lobbying against such latitude being granted to the Fed.
Because of this, the process of changing the Fed to become a super-regulator is going to take many years. In the immediate, the concept of financial stability is primarily predicated on first disallowing a bubble from occurring in asset prices, most specifically stocks, by way of using the most blunt monetary policy tool available, which is controlling the cost of capital by way of raising the Fed funds rate target.
What's confusing about this is that although the Fed has the authority to raise rates as a means of preventing a bubble from occurring, or even popping one after it has occurred, as a means of pursuing financial stability, it is not historically the way the Fed has operated.
Compounding the confusion is that there is no cohesive message being delivered by the Fed's three most important members -- Yellen, Fischer and New York Federal Reserve Bank President William Dudley -- about what to do and why right now.
Some members are focusing on the need for rate hikes due to asset bubbles forming, while others are focused on the more traditional metric of declining unemployment rates.
I'm not sure how this is going to play out in the immediate future, but what is certain is that the Fed is in the process of evolving into a central bank with authority and responsibilities that go far beyond monetary policy and historical precedence.
What's lacking is a public acknowledgment of this.