An Unnecessary Fix for the Fed; Legislation in pursuit of 'transparency and accountability' has little to do with either.
The House Financial Services Committee held a hearing on Federal Reserve reform on July 10. The hearing didn't get much press attention. But it was remarkable. While the House can't manage to engage on important issues like tax reform, immigration reform and the minimum wage, it's more than willing to propose radical "reform" of one of the few national policies that is working well.</br></br>The bill under consideration is called the Federal Reserve Accountability and Transparency Act. (That's right: FRAT.) To be fair to an otherwise dreadful bill, accountability and transparency are worthy objectives, and FRAT does include some reasonable ideas, such as trimming the news blackouts before and after meetings of the Federal Open Market Committee. But it also includes some corkers, such as requiring public disclosures--in advance--before entering into international negotiations, disclosures that could make such negotiations next to impossible. How would you like to play your poker hand open?</br></br>But the meat-and-potatoes of the House bill has little to do with either transparency or accountability. Instead, it seeks to intrude on the Fed's ability to conduct an independent monetary policy, free of political interference.</br></br>As the title of Section 2 puts it, FRAT would impose "Requirements for Policy Rules of the Federal Open Market Committee." A "rule" in this context means a precise set of instructions--often a mathematical formula--that tells the Fed how to set monetary policy. Strictly speaking, with such a rule in place, you don't need a committee to make decisions--or even a human being. A handheld calculator will do.</br></br>In the debate over such rules, two have attracted the most attention. More than 50 years ago, Milton Friedman famously urged the Fed to keep the money supply growing at a constant rate--say, 4% or 5% per year--rather than varying money growth to influence inflation or unemployment.