Hoover Monetary Policy Conference 2026 Overview Essay
This is an overview essay. You can find the conference schedule, videos, and slides here or in my last post. The essay original is on the Hoover website here, with nicer formatting and pictures. This is joint with Valerie Ramey, Michael Bordo and Tom Church. If this is too long for your email client, come to the original at grumpy-economist.com or via the above link at Hoover.
Independence, Structure, and Risks Ahead for Central Banks
The Hoover Institution convened its annual Hoover Monetary Policy Conference May 7-8, 2026, with scholars gathering to explore themes of Independence, Structure, and Risks Ahead for Central Banks. Michael Bordo, John Cochrane and Valerie Ramey organized the conference.
The Federal Reserve is in a period of transition and structural challenges. The chairman of the Federal Reserve’s term has ended, and a successor has been confirmed. Inflation has not fully returned to target, and new shocks, a tariff wave, and a rise in the price of oil, have pushed inflation back up. Fiscal deficits remain large. The dollar’s share of global reserves and of foreign holdings of Treasury debt has been falling for two decades. And a wave of enthusiasm about artificial intelligence has begun to reshape expectations about growth, inflation, and interest rates, including much optimism but also much fear.
The conference took up a connected set of questions about whether central banks can remain independent, necessary, and accountable all at once, as risks old and new continue to appear and recede.
Where are the legal and institutional foundations of central bank independence strong and where are they exposed? How are fiscal pressures and the changing status of the dollar reshaping the environment in which monetary policy operates? What mandate, what tools, and what accountability framework should a central bank have? How should financial stability and bank supervision be recalibrated after the great inflation of 2021 and 2022 and the bank failures of 2023? And what does an era of localization, geopolitical competition, and an anticipated AI boom imply for inflation, growth, and interest rates?
Opening Remarks
Hoover Senior Fellow Valerie Ramey welcomed participants to the conference, which John Taylor and George Shultz launched more than a decade ago.
Condoleezza Rice, Hoover Institution director and the former secretary of state, spoke of the international setting. The world, she said, is in transition from one international economy to another. Eighty years of a system the United States and its allies built after the Second World War is being left behind. It was a positive-sum system in which wealth was produced by trade and cooperation, protected by American military power. Through the Cold War, she said, the international economy and national security ran on parallel tracks, because the Soviet Union was a military giant, but limited in an economic and technological sense. China has changed that. The two tracks have converged, and it is no longer possible to discuss the international economy without discussing national security.
The conference, she urged, should treat technology, national security, and the international economy as one conversation. She closed with a warning that the United States, long the gravitational center that held the postwar order in orbit, now seems to be one of the sources of instability. The United States, with its size and power, should at least not be a great source of global uncertainty.
Independence and Governance
Hoover Senior Fellow John Cochrane chaired the opening session, which examined central bank independence through practice, history, and present-day legal vulnerability.
Edward Nelson (Federal Reserve Board) surveyed how Fed independence has operated in practice, with a focus on the period from William McChesney Martin through Alan Greenspan. He distinguished instrument independence from goal independence. The Federal Reserve chair conferring with the executive on shared objectives is not a loss of independence, while setting the instrument under outside direction would be. On that test, he argued, there is only one clear-cut historical case of lost independence: the period before the 1951 Treasury Accord in which the Fed explicitly agreed to support the price of long-term bonds. In the years prior to 1951, the Federal Open Market Committee and the Truman administration fought openly about interest rates, with the FOMC urging higher rates in the years after World War II to curb high inflation. Nelson, looking at the extensive record, cast doubt on the oft-told story that President Nixon pressured the Fed to keep interest rates low in the runup to the 1972 election. As in many other episodes, the Fed kept policy loose of its own accord, based on Arthur Burns’s views that price and wage controls would be effective.
Gary Richardson (UC-Irvine) placed central bank independence in US constitutional history. An independent central bank is an old political idea, rooted in the founding-era debates over the First and Second Banks of the United States. The initial ambiguity over a central bank’s constitutionality was settled by Hamilton’s implied-powers argument in McCulloch v. Maryland. Richardson traced three great reforms: the quasi-private regional design of 1913, the centralized structure of 1935, and the clarified mandate and semiannual reporting of 1977. On the recent presidential challenge against Jerome Powell, he opined that the system is working as designed. The board did its job in resisting pressure, while the Senate and the Supreme Court did their jobs by doing relatively little. Little was enough, because if the Senate and the court do not act, the president cannot exercise control over the Federal Reserve.
David Wilcox (Peterson Institute for International Economics) offered a darker view. The pillars of Fed independence include the staggered terms of governors, the exemption from appropriations, and “for cause” removal protection. A current central vulnerability, he argued, sits in the reappointment of Reserve Bank presidents. Section 11(f) of the Federal Reserve Act lets the Board of Governors remove an officer or director of a Reserve Bank on language weaker than the “for cause” protection that shields governors. Also, a quirk of the system puts all governors up for reappointment in years numbered 1 and 6. A determined two-term president, guaranteed several board appointments, could in principle install governors willing to remove all dissenting Reserve Bank presidents. If a court ruled that Reserve Bank presidents lack effective “for cause” protection, he said, independence could falter by this mechanism.
Fiscal and Monetary Policy Interactions
Oliver Bush of the London School of Economics chaired the second session, on the interactions between fiscal and monetary policy. The three presenters shared a worry: that fiscal pressure is changing the ground on which monetary policy stands.
Michael Bordo (Hoover Institution and Rutgers University) covered two centuries of British fiscal history. He opened with the oldest question in fiscal policy: how should government debt be wisely used? In the UK, the classic “Treasury view” of fiscal discipline held that the government should borrow only in time of dire necessity, such as a war, but not otherwise. The government should then reliably repay, including restoring the currency to gold parity. In part, reliable repayment allows the government to borrow on good terms in the first place. Robert Barro’s tax-smoothing analysis is the basis of modern understanding of this view. The Treasury view dominated before the Great Depression and Second World War. Keynesian demand management displaced it, attaching to fiscal policy objectives that had little to do with wartime necessity or debt sustainability. Intentional deficits should stimulate the economy, with little concern over whether the expenditure was per se worthwhile or eventual repayment. The Treasury view was gradually restored in the 1980s and 1990s. The British record of very high inflation in the 1970s is a natural experiment in what happens when fiscal objectives drift from sustainability and in what it takes to recover the prior norm.
Barry Eichengreen (UC-Berkeley) documented the erosion of the dollar’s dominance as the world’s reserve currency. The US share of allocated foreign exchange reserves fell from 72 percent in 2001 to 56 percent in 2025, and foreign central bank holdings of US Treasury debt from roughly 40 percent to about 14 percent. He tied the risk of fiscal dominance to the trajectory of US debt and to political polarization. He anchored the analysis on the Bohn test, which asks whether the primary surplus responds positively to the debt ratio. Currently, low interest costs seemed to seduce our governments into borrowing, but large debts have not induced restraint.
Hanno Lustig (Stanford Graduate School of Business) argued that the special place of Treasury debt is evaporating. Before 2020, Treasuries provided a large convenience yield or liquidity premium. Investors accepted lower yields and paid higher prices than Treasuries’ fundamentals justify. In Lustig’s analysis, that convenience yield has evaporated, at least on the margin. Investors, in his reading, have moved from treating Treasuries as safe, liquid, money-like debt to pricing them as risky debt. Liquid asset provision can no longer substitute for fiscal discipline.
The session converged on the monetary policy question: how should central bankers proceed in the face of sustained fiscal pressure? There will be fiscal pressure to monetize debt and hold down both short and long-term interest rates, especially in the next crisis.
International Issues
Sebastian Edwards chaired the third session, which weighed the international issues: what the dollar’s reserve-currency status is worth, what the recent tariffs are doing to trade and prices, and what holds dollar dominance in place.
Arvind Krishnamurthy (Stanford Graduate School of Business) walked through a calibrated computation of what the dollar’s reserve-currency status is worth. The United States, he argued, exports safe dollar debt the way Taiwan exports semiconductors, and uses that exported value to buy consumption goods. If world demand for dollar assets disappeared, the dollar would depreciate by around 9 percent, and the natural rate of interest would rise by about a percentage point. The annual seigniorage, or the profit the US government or central bank earns by issuing currency, is around 1 percent of GDP. He said this seigniorage has a present value of roughly $33 trillion, almost a year’s GDP, built into bank capitalization, into housing finance through mortgage rates, and into the implicit tax burden through the value of government debt. It is worth recognizing the size of this asset, he concluded, before choosing to give it away.
Stephen Redding (Stanford University) gave a trade economist’s account of recent trade policy. The average import-weighted US tariff had fallen below 2 percent by the mid-2010s. The tariff waves of 2018 and 2019 and of 2025 and 2026 raised protection toward levels last seen under Smoot-Hawley in the 1930s. He documented a “great reallocation” of US import sourcing, with China’s share down from a 2015 peak above 20 percent to around 11 percent, substituted by Vietnam, Taiwan, and Mexico, though indirect exposure to China remains. The direct price-level effect of the tariffs, he judged, is real but modest, on the order of half to a full percentage point on the consumer price index. It has mostly been absorbed by US consumers, importers, and retailers. He noted a puzzle: tariffs should raise the exchange rate. The difference between savings and investment drives the overall trade balance, so a higher exchange rate leaves the dollar price of imports the same. But the dollar did not appreciate on the day of the largest 2025 tariff announcement. That outcome might be explained by a breakdown of the flight-to-safety pattern Lustig had described. Raising tariffs makes the United States a riskier lender, which lowers the exchange rate.
Kenneth Rogoff (Harvard University) broadened the framework to consider political economy, drawing on his recent book Our Dollar, Your Problem. Macroeconomists neglected political economy, he said. The 2010s consensus that inflation was dead and rates would stay low was a product of that abandonment. Krishnamurthy priced one advantage of dominant-currency status. Rogoff added others. Sanctions are a first one: dollar dominance allows the United States to inflict pain on other countries through sanctions, though overuse induces those countries to construct alternatives. The information that flows from so many transactions touching the dollar is another advantage. Dollar swap lines, in which the United States lends dollars to foreign central banks, are part of the dollar’s anchoring of the global financial system: we are essentially other countries’ lender of last resort. The dollar’s status carries costs too. There is the “exorbitant duty,” by which the dollar appreciates in bad times and the United States suffers losses on its foreign asset holdings, though it benefits from cheaper goods. And there is the requirement of a military, because in his view no country sustains a dominant currency without a dominant military. Rogoff read 2015 as the peak of dollar dominance. He was skeptical that artificial intelligence is disinflationary. The Fed sets inflation over the long run, he said. The real question is what AI does to the real rate of interest. Like most productivity shocks, if AI raises productivity that should push up the real rate, to induce people not to spend now riches that lie ahead, and to save in order to provide the investment funds that AI will need.
Mandate, Tools, and Regulation
Hoover Senior Fellow Valerie Ramey chaired the fourth session, which discussed interactions between the Fed chair and other officials, and focused on the scope of and nature of central bank mandates.
Thomas Drechsel (University of Maryland) discussed his research that uses meeting calendars to track how Fed officials interact with other government officials. Who do Fed chairs actually meet and talk to, and how often? A notable finding: Chair Powell met with members of Congress dramatically more than his two predecessors, most often with the leadership of the Senate Banking Committee or the House Financial Services Committee. Powell, in Drechsel’s reading, proactively built relationships with Congress. Drechsel also used presidential calendars extending back to 1933 to record the frequency of interactions between presidents and Fed chairs. He reported that President Nixon and Arthur Burns met 160 times, while President Clinton met Fed officials only six times. Inflation, however, was much less of an issue in the 1990s. Relevant to Fed independence, he found that more frequent interactions led to higher subsequent inflation even after accounting for current inflation.
Luis Garicano (London School of Economics) used the European Central Bank (ECB) example to argue that a narrow legal mandate is necessary but not sufficient. The ECB has drifted from its narrow price-stability mandate and has vastly expanded the scope of its activities. The ECB uses two open-ended rationalizations: protecting “monetary transmission” through “dysfunctional” or “fragmented” markets and ensuring “financial stability.” Garicano traced three resulting dominances: fiscal dominance through quantitative easing and spread-compression tools, financial dominance through emergency and subsidized lending, and climate dominance through treating climate risk as a price-stability risk. Moral hazard is the result. Europe expects bailouts, so politicians do not clean their fiscal houses. The November 2025 French pension-reform reversal is a clean illustration.
The ECB has greater independence but weak accountability. A central bank needs both. Though the ECB has a narrow-written mandate, the oversight committees of the European Parliament are ineffective to control the ECB’s slow expansion of that mandate to include sovereign bailouts, fiscal transfers, and other interventions.
Carolyn Wilkins (Princeton University) argued that the analytical framework for monetary policy is reasonably mature, while the one for financial stability is not. Monetary policy has a measurable mandate. Financial stability does not. Success is when nothing happens, and the costs are visible while the benefits are only counterfactual. Wilkins also argued that a central bank’s everyday balance-sheet operations should be subject to governance different from the extraordinary balance-sheet tools it deploys in financial stress or when interest rates hit the lower bound. Durable independence, she argued, rests on institutional design, citing the Bank of England’s separation of its prudential-regulation chief from its Monetary Policy Committee, and on independent external evaluation. No student, she observed, should set and grade their own exam.
Risks, Challenges, and Opportunities
Hoover Senior Fellow Ross Levine chaired the fifth session, which ranged from the forces reshaping the macroeconomy to the size of the Fed’s balance sheet to the reorientation of financial stability policy.
Marvin Barth (Thematic Markets) gave a market forecaster’s account of what drives global markets. Four forces, in his telling, are jointly pushing up potential growth, neutral rates, and inflation persistence. The first is localization, where automation makes producing near high-value customers cheaper than a global supply chain. Globalization becomes the first casualty of artificial intelligence. Second, self-fulfilling expectations: flexible average inflation targeting unhinged inflation expectations. Third, global entropy. The West forgot that power comes from the capacity to manufacture. China did not. And finally, the politics of rage, which he argued cannot be educated away. Barth pressed the issue of Fed accountability. Actual growth has outpaced the most optimistic FOMC trend estimates for over a decade, he said, and the Powell Fed has had the lowest rate of dissent since the 1951 Treasury Accord.
Darrell Duffie (Stanford Graduate School of Business and Hoover) explained that reducing the Fed’s balance sheet, now above $6 trillion, is not so easy. The balance sheet is constrained by liabilities more than by assets. Reserve balances, about $2.9 trillion, are the dominant liability. Why does the system need that many reserves when only $10 billion sufficed in 2007? Post-crisis liquidity regulation has sharply increased the minimum necessary reserves. This regulation has effectively told the largest banks not to lean on the Fed for intraday liquidity, so they must always have enough reserves to cover payments. For example, banks cannot rely on borrowing from the Fed or intraday overdrafts to match payments that come even an hour before receipts. Duffie offered four ideas for cutting the demand for reserves, in ascending order of difficulty: temporary open-market operations to smooth daily swings; getting banks to use the Fed’s intraday-liquidity facilities without stigma; building a liquidity-savings mechanism like those of other major central banks; and tiering the interest rate on reserves. In the final of the four measures, banks would earn less than the key overnight lending rate on reserves stored at the central bank, above an agreed-upon amount. Duffie did not opine on whether lowering reserves is desirable; his analysis just concerns how to do it if it is so wishes.
Christina Skinner (US Treasury) described how the Financial Stability Oversight Council has been reoriented under Secretary Scott Bessent. The council was created on the view that systemic risk could be handled by extending bank-like regulation beyond banks. That view, she said, has turned out to be a flop. Over time the council drifted into a ratchet of ever-greater precaution that became self-defeating: a system built to eliminate volatility suppresses the dynamism that makes the system resilient. The reorientation rests on two propositions: First, growth is a foundation of financial stability, not in tension with stability, so regulation cannot be judged only by its effect on measured risk inside the financial sector. Second, financial stability is inseparable from economic security, because the sources of systemic risk increasingly sit where finance and geopolitics meet.
Policy Panel
Hoover Senior Fellow Paola Sapienza chaired the closing policy panel, consisting of four Federal Reserve officials. The panelists, asked to offer big-picture structural thoughts, ranged over bank supervision and private credit, the discipline of forecasting, the rate implications of an AI boom, and the structure of Reserve Bank operations.
Michelle Bowman, vice chair for supervision of the Federal Reserve Board, set out an agenda for helping the regulated banking system to compete with private credit in corporate lending. The bank share of corporate lending has fallen from 48 percent in 2015 to 29 percent in 2025, and private credit is now about $1.4 trillion. In her view, post-2008 capital and liquidity rules went too far in places. Current rules treat bank lending to private credit funds more favorably than lending directly to creditworthy corporations. Her proposed response has three pillars: reduced capital requirements, including a proposed cut in the risk weight on investment-grade corporate lending from 100 percent to 65 percent; a preserved role for private credit; and a new data collection on the largest banks’ lending to non-depository financial institutions. Bowman also gave a candid account of the supervisory failures around the Silicon Valley Bank collapse of 2023. The bank had more than thirty supervisory findings, only a handful about the material risk that brought it down. Even those were not acted on. She reported that the Fed has commissioned an outside review.
Mary Daly, president of the Federal Reserve Bank of San Francisco, described how the San Francisco Fed disciplines its forecasting with structured data. In view of the poor accuracy of past forecasts, especially to spot inflation ahead in 2021, such reflection is welcome. After the global financial crisis, facing natural-rate-of-unemployment estimates as high as 9 percent, the San Francisco Fed built labor-market dashboards that scored each data series against its historical norm in order to see patterns spread across multiple indicators. In time, the conclusion was that the labor market was more flexible than the high estimates assumed, with the natural rate closer to 5.6 percent. After the inflation miss of 2021 and 2022, the San Francisco Fed built an inflation dashboard on the same principle. Applied to the current tariff shock, the dashboard shows little persistence, which gave her confidence that looking through it was reasonable. As of the spring data, she said, the dashboard is starting to show red. She is watching supply-chain indicators, because clogged supply chains take a long time to clear. The Fed, she said, must discipline its models and qualitative assessments with incoming information disciplined by history.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, addressed a pressing question: how would a productivity boom induced by AI affect interest rates? Goolsbee presented an exercise in a standard new-Keynesian model. One important lesson: an unexpected rise in productivity growth and an expected rise have opposite implications for rates. An unexpected boom raises output above potential, but the disinflationary effect dominates and the policy rule calls for lower rates. That is the mid-1990s case. An expected boom, the case the AI consensus implies, is different. Forward-looking households start to consume immediately, anticipating their great future wealth and incomes, before capacity has expanded. Demand threatens to overheat the economy. The natural (non-inflationary) rate rises. The rule calls for higher rates. In the model analysis, it is important to act quickly, as a central bank that waits for inflation to appear makes the outcome worse. Later, he agreed that uncertainty about the productivity effects of AI might argue instead to wait to see any effects before reacting. Surveys put expected AI-driven productivity gains at roughly a percentage point a year for the next decade, so most of the boom is expected to be still ahead. Productivity growth is a boom for the economy, he said. What it means for interest rates is more subtle, and the bigger the hype, the bigger the concern.
Christopher Waller, governor of the Federal Reserve Board, spoke about the structure of Reserve Bank operations. The Fed’s decentralized regional design reinforces independence by representing a full range of views, and that should be preserved. But back-office functions like IT, human resources, and payments do not depend on geography, and there is no reason in his view to run them in twelve different ways. Waller proposed centralizing and standardizing them, with one Reserve Bank acting as a contractor to the others, the Board overseeing rather than deciding, and the Reserve Banks keeping operational control. The change requires a shift from a “bank first, system second” mindset to a “system first, bank second” one. The Reserve Bank presidents, he said, have already developed a framework along these lines in some areas of their operations such as check clearing.
Dinner Address
Tyler Goodspeed, a former chairman of the Council of Economic Advisers, delivered the dinner address, “Firefighters and Arsonists: Monetary Policy and the History of Recession.” Drawing on his new book that extends US and UK recession chronologies back to 1700—132 recessions in all—he argued that the “boom-bust” view of business cycles fails every test one can put to it. The contours of an expansion carry no information about the recession that follows.
Expansions never die of old age. No leading indicator forecasts recessions reliably over four centuries. And recessions do not cleanse: if anything they discriminate against the young, against dynamic firms, and against research and development. Each recession, in Goodspeed’s telling, is an expansion that failed in its own way.
Naming a recession after some excess in the preceding expansion is pattern-seeking where there is no pattern, and it is not innocuous: it tempts us to sedate healthy expansions in the false belief that doing so prevents recession.
However, how policymakers handle unforecastable recessionary shocks can make matters better or much worse. His illustration was 2008: in his view, the fundamental shock was the energy price surge in early 2008. That surge led to the mortgage problems, as many recessions spill over to real estate. But what could have been a garden-variety postwar energy recession became far worse when British authorities, over a September weekend, abandoned the classic Bagehot playbook. They blocked a stronger bank from acquiring Lehman Brothers. Lehman failed, and then a widespread systemic run developed which even massive bailouts could not stop.
Goodspeed closed the conference on a positive note: expansions are living longer as households, firms, and to some extent governments learn to absorb shocks. He also emphasized that growth during the years of expansion matters far more for eventual prosperity than the painful episodes of temporary contraction.
Exceptionally interesting, thanks for sharing. If the convenience yield of Treasuries has evaporated, is seigniorage the only ‘bubble’ left to mine for the US government?