Central Bank's Mandate Draws a Spotlight
With unemployment at 9.6% and inflation below the Federal Reserve's working definition of "price stability," this seems a strange moment for Congress to contemplate instructing the Fed to focus exclusively on fighting inflation.</br></br>But Sen. Bob Corker (R., Tenn.) wants to revive that notion, which has lain dormant for more than a decade because there has been so little inflation. "I am concerned about inflation down the road," he explains. "The time is right for us to bring clarity to the Fed." In the House, Paul Ryan (R., Wis.) and Michael Pence (R., Ind.) agree. Mr. Pence argues that the Fed's quest to combat unemployment by buying $600 billion in U.S. Treasurys is a failure and threatens to "monetize our debt and trigger inflation."</br></br>The implication is that the Fed has lost its moorings. Has it really? For more than 30 years, Congress has charged the Fed with aiming at "maximum employment, stable prices and moderate long-term interest rates." That wording has long made some Fed officials and academic economists uneasy because it is rooted in a now-abandoned view that the government could dial up a little more inflation to get a little less unemployment and vice versa.</br></br>The current consensus is that the Fed can -- and, indeed, is now attempting to -- reduce unemployment in a recession, but in the long run can deliver only price stability. What Fed Chairman Ben Bernanke calls "the longer-run sustainable unemployment rate" is determined by demographics, job-market rules and other factors beyond the Fed's control. In this view, if the Fed tried to push unemployment too low now, it could create too much inflation later, the mistake the Fed made in the late 1970s.</br></br>But it is not the 1970s. Even though the Fed has been holding short-term interest rates near zero for nearly two years, prices rose at only a 1% annual rate in the third quarter, the Commerce Department said Tuesday. No measure of inflation expectations foresees anything like the 8%-plus inflation of the '70s. And it's hard to find a single Greenspan or Bernanke decision that would have been different if they had an inflation-only mandate. So why all this now?