Republicans Are Right, Fed Needs a New Mission

It would be a shame to go through the worst slump since the Great Depression and not do some radical thinking about monetary policy. 

Bloomberg Businessweek's Joshua Green asked U.S. Senator Rand Paul in an interview who he'd pick to run the Federal Reserve. Paul named two dead guys: Friedrich Hayek and Milton Friedman. "Let's just go with dead," Paul added, "because then you probably really wouldn't have much of a functioning Federal Reserve."

Even in spirit, Hayek and Friedman were an odd pair for Paul to recommend because they had vastly different views on monetary policy. They never got along. (Friedman saw to it that Hayek was denied a position at the University of Chicago.) But Paul hardly represents Republican thinking on monetary policy in any case: He's known to be nutty on the subject, like his father. Representative Kevin Brady, who chairs Congress's Joint Economic Committee, makes a more plausible spokesman.

Brady published an op-ed in the Wall Street Journal yesterday that called for a major congressional review of monetary policy. If he had his way, he says, the Fed's dual mandate would be changed: The central bank should be told to stop concerning itself with unemployment and instructed to think only about "price stability," including asset prices.

That's a bad recommendation, but the review is a good idea. Brady wants to form a 12-member commission to look over the Fed's last 100 years and make recommendations for a new legislative mandate.

"Advocates of different monetary regimes—discretionary policy, inflation-rate-targeting, price-level-targeting, nominal GDP-targeting, a gold standard—would have an open forum in which to make their case based on empirical evidence," Brady writes. "After a comprehensive review involving our best monetary economists, the commission would make recommendations to Congress, as was done before the Fed was established."

It would be a shame to go through the worst slump since the Great Depression and not do some radical thinking about monetary policy. Whether you think that the Fed should be blamed for doing too much or doing too little -- for inflating a housing bubble or for standing by as the financial sector froze and aggregate demand collapsed -- it's the right time for this conversation.

The Fed's job has changed a lot since 1977, when Congress did its last such review. Inflation is running at 1.3 percent, not 6 or 7 percent. Lately the Fed has chosen to reinterpret its mandate unilaterally -- by adopting an explicit target of 2 percent inflation. Independence in carrying out the mandate is one thing; freedom to redefine it is another. Congress shouldn't make monetary policy (and it shouldn't have the right to tune into the Fed's internal debates, as the Pauls want, so that it can second-guess the Fed on interest rates). But it's Congress's job to set the Fed's goals, and the central bank shouldn't be changing them on the fly, as it did last January.

I have a suggestion for Brady's committee: We don't need to hear members of Congress bloviate any more about money. We get that every time Fed chairman Ben Bernanke appears before the House and Senate. If Brady's proposal is adopted, the commission should be told to listen to economists who actually know what they're talking about. And it wouldn't hurt to have an economist or two as voting members of the panel.

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