Representative Kevin Brady, a Texas Republican, wants the Federal Reserve to be single-minded.
In 1977, Congress required the central bank to serve three masters: It is supposed to promote stable prices, maximum employment and moderate long-term interest rates. Brady, who will be chairman of the Joint Economic Committee in the new Congress, wants to eliminate those last two missions. His “Sound Dollar Act” would make the Fed responsible for price stability, period.
The congressman believes that the Fed’s current “dual mandate” (that’s what Fed watchers call it, ignoring the statute’s mention of interest rates) gives it too much discretion. “Over the last several years, the Federal Reserve’s actions have become unpredictable,” he said in a telephone interview. He finds the Fed’s Dec. 12 statement -- in which it said it wouldn’t tighten monetary policy until unemployment fell to 6.5 percent or inflation accelerated to 2.5 percent -- “particularly troubling.”
The best thing the Fed can do to reduce unemployment in the long run, he says, is to foster price stability. The bill has garnered support from conservatives as their concern over the Fed’s quantitative easing has grown. Washington Post columnist George Will and the editors of the Wall Street Journal have written in favor of the bill, and Senator Marco Rubio, a Florida Republican, is a co-sponsor. The Stanford University monetary economist John Taylor and St. Louis Fed President James Bullard favor it, as well.
It seems unlikely, however, that the bill would accomplish what its supporters want, and it comes with a serious political downside for Republicans who embrace it.
It’s not clear, first of all, that the Fed’s current mandate has distorted its behavior in the ways Brady thinks. The Fed has done a much better job at fostering price stability since it got its dual mandate than it did before then. There has been no deflation like that of the 1930s and no inflation like that of the 1970s. Since the 2008-2009 recession, the Fed has often refrained from loosening monetary policy even when unemployment forecasts have been above its target and inflation forecasts below it. So how much has the dual mandate really influenced its decisions?
Nor would Brady’s bill do much to reduce the Fed’s discretion. Earlier this year, Brady applauded the central bank for defining price stability as 2 percent annual inflation. He says it is long-term stability that matters: If inflation comes in below the target one year, it should rise above it the next, to keep prices on as predictable a long-term path as possible. But during the past few years inflation and expectations of future inflation have at times fallen below 2 percent. Concern about a sudden drop in inflation, or of outright deflation, has partly motivated the Fed’s rounds of quantitative easing. And making up for past below-target inflation could easily justify letting it accelerate temporarily to 2.5 percent.
If Brady’s bill were law, in other words, the Fed could have pursued the same basic monetary policy that has alarmed so many conservatives. It would merely have had to describe what it was doing a bit differently.
Supporters of the bill respond to this criticism by noting that the Fed started taking unorthodox steps, such as quantitative easing, at the same time that it began mentioning unemployment in justifying its decisions. Thus, they say, the dual mandate is affecting Fed policy. What they are ignoring is something else that happened around the same time: a financial crisis and severe recession. Inflation slowed, unemployment soared and interest rates were so low that unorthodox moves were the only way to loosen monetary policy. A Fed afraid of deflation and blind to unemployment could, and probably would, have taken the same steps.
The bill also has two political vulnerabilities, and each makes the other worse. Its supporters, mostly Republicans, will be on record as saying the unemployed are no concern of the Fed’s -- indeed, as saying that the Fed should be banned from doing anything to help them. All 27 Democrats on the House Committee on Financial Services have written a letter raising this issue.
The presidents of the regional Feds would also get permanent voting status under the bill. Those presidents are chosen by boards that include commercial banks. The rationale for this move is that the Fed is dominated by New York and Washington. Democrats and Tea Partiers may, however, see this reform as a favor to bankers. Giving bankers more power while stiffing the unemployed doesn’t seem like a good strategy for Republicans.
Brady is right to think that clearer statutory guidance could make monetary policy more predictable and credible. To achieve those goals, however, he will have to go back to the drawing board.
(Ramesh Ponnuru is a Bloomberg View columnist, a visiting fellow at the American Enterprise Institute and a senior editor at National Review. The opinions expressed are his own.)
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