The Only Fed Rule Is That There Are No Fed Rules

One of the most frequent recommendations for monetary policy is that the Federal Reserve should be subject to a rule. Milton Friedman proposed money-supply-growth rules in the 1970s, and since then we have seen calls for interest-rate rules, nominal GDP rules, inflation rules, price-level rules and Taylor rules, among other options. Often I’m sympathetic, but the very nature of American government makes such rules impossible to implement.

Let’s step back for a moment and consider Congress, the most fundamental institution of American democracy. Congress has the ultimate power of the purse, subject to presidential and Supreme Court vetoes. One year’s Congress may try to bind the hands of the next, but those attempts usually fail. Various budgetary rules for fiscal restraint have been tried and discarded. That’s unfortunate in my view, but it’s hard to force major changes on a system that doesn’t really want them.