With the American economy still struggling to recover and its long-term structural strength in question, policymakers and politicians are focusing on the Federal Reserve. Republican congressman Kevin Brady of Texas, the vice chairman of the Joint Economic Committee, is proposing new legislation that aims to reorient the Fed’s mandates from Congress to a single role: maintaining price stability.
“Economists broadly agree that the best way for a central bank to help maximize real economic growth and job creation is to maintain stable prices over time,” Brady said Monday afternoon at the American Enterprise Institute. “One need only look to the Great Depression of the 1930’s and the Great Inflation of the 1970’s to see that both price deflation and price inflation are destructive. Both reduce real output and employment below what they would have otherwise been. Thus, the goal of monetary policy should be long-term price stability.”
Brady's proposal is the Sound Dollar Act, and it would redefine the Fed’s dual mandate—keeping prices stable in the long-run while promoting maximum employment in the short-run—as a single mandate to maintain price stability. Monetary policy, Brady argues, “can’t boost real output and job creation. Instead, using monetary policy as a short-term tool to speed growth may actually harm the economy.”
The bill, which will be formally introduced in the House of Representatives on Thursday, also seeks a number of other policy prescriptions to problems of the modern Fed. One provision would require that the Fed articulate a lender-of-last-resort policy, and another would require it to monitor prices for a broader range of assets, including gold and the dollar’s foreign exchange value, to help avoid asset bubbles like the housing bubble that burst in 2008.
Brady’s bill would push for a “rules-based regime” at the Fed, focused on targeting inflation, in opposition to the discretionary regime where policymakers direct monetary policy more subjectively. “Inflation-targeting is a rules-based regime, under which a central bank establishes a target inflation rate expressed in terms of a broad-based price index of goods and services,” Brady said. “A central bank tightens monetary policy when the actual inflation rate rises above its target and loosens monetary policy when the actual inflation rate falls below its target.”
Brady said he hopes the bill will gain bipartisan support but that he would not expect President Barack Obama to sign it into law if it reached the Oval Office. “Our goal today…is to start a thoughtful debate,” Brady said.
After Brady’s presentation, four experts from varying perspectives discussed the proposal. While all agreed Brady’s intent to address some of the Fed’s major shortcomings was admirable, not everyone found all of the proposals convincing. Donald Kohn of the Brookings Institutions praised Brady’s “constructive effort” but said the idea of monitoring asset pricing was “very tricky and very difficult.” J. Alfred Broaddus, a former president of the Fed’s Richmond bank, said he agreed with the bill’s broader goal but cautioned against some of its other provisions, including one that would expand membership of the Federal Open Markets Committee to each regional bank president.