Jobs or inflation — Is the Fed distracted?
The Federal Reserve doesn’t get much love from Washington these days but it did receive a rare bit of political backing on Wednesday as Democrats defended its role in promoting full employment as well as stable prices.
The U.S. central bank has been the target of criticism from members of both political parties as a result of bank bailouts and hands-off rule-enforcement that let predatory and unsound lending practices go unchecked, among other shortfalls.
But discussing legislation narrowing the Fed’s mandate to a single-minded focus on price stability, Democrats questioned the need to drop the full employment side of the dual mandate.
“Is it a problem?” asked Minnesotan Keith Ellison. “To the degree that we have problems with monetary policy, is the dual mandate the cause?”
Ellison said that far from distracting the Fed, the lofty 8.1 percent unemployment rate should get greater attention. “This is a national disgrace,” he said.
Ron Paul, a presidential candidate who chairs a subcommittee on domestic monetary policy, held a hearing to discuss several pieces of legislation changing the Fed’s mandate. Two of these would limit the Fed’s focus to price stability.
With partisan divisions and other priorities, Congress is unlikely to make any changes to the Fed’s mandate this year. But the effort could gain momentum if Republicans control both houses of Congress after November.
“This may be – as much as I’d like the action this year – a case of setting the foundation in Congress for action next year,” said Rep. Kevin Brady, the author of one of the bills.
Brady told the hearing that the Fed’s aggressive efforts to boost growth had actually weakened it instead, he said. “The Fed’s interventionist approach is a contributing factor in this anemic recovery,” Brady said.
The Fed is trying to do too much, and its actions are an attempt to compensate for the shortfalls of the White House’s economic policies, Brady said. “The more the Fed does, the less responsibility the White House and the Congress has taken.”
Brady also wants all of the regional Fed bank presidents to vote every month on monetary policy to shift the balance of power away from Wall Street and Washington. As it currently stands, regional Fed bank presidents rotate through voting slots for a year at a time.
The top Financial Services Committee Democrat, Barney Frank, and a former Fed vice chair, Alice Rivlin, urged against tinkering with the Fed’s responsibilities. “It would be a grave error to repeal the dual mandate,” Frank said, adding he would welcome a vote on the legislation at a time when Americans are worried about getting and holding on to jobs.
“There is clearly a major party difference,” Frank added. “Those on the Democratic side think that unemployment is a very serious problem that deserves to be addressed explicitly. Let’s debate it before the election.”
First term congressman David Schweikert, one of a handful of lawmakers who sat through both panels of the two-hour hearing, said he is worried that the Fed’s bloated balance sheet could have unintended consequences for inflation and growth.
The Arizona Republican also said he thinks there are compelling arguments for why the Fed’s dual focus on growth and price stability can work at cross purposes.
However, he said he has not made up his mind about whether to support legislation limiting the Fed to price stability enforcement, and said his first priority will be better understanding the institution. Many lawmakers don’t fully grasp what the Fed does and how it operates, he said.
“For many members the whole Fed, monetary policy, … the whole mechanics – the understanding is fairly thin,” he said.
Frank, who is not seeking re-election in November, couldn’t resist a quip in response to Brady’s argument that the Fed is an outlier among global central banks, most of whom have a single mandate to ensure price stability.
“I thought my Republican colleagues were in favor of American exceptionalism,” he said.