Details

Autor(en) / Beteiligte

• Dorn, James

Titel

Myopic Monetary Policy and Presidential Power: Why Rules Matter

Ist Teil von

• The Cato journal, 2019-10, Vol.39 (3), p.577-595

Ort / Verlag

Washington: Cato Institute

Erscheinungsjahr

2019

Quelle

PAIS Index

Beschreibungen/Notizen

• In the absence of a monetary rule, a central bank is vulnerable to politicization. In the case of the United States, Congress delegated monetary authority to the Federal Reserve in 1913 and has increased the scope of that authority over time, especially following crises. However, Congress has never enacted an explicit rule to guide Fed policy, and it has used the Fed as a scapegoat when things go awry. By law, the Federal Reserve has a triple mandate to "promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." In doing so, the Federal Open Market Committee (FOMC) is instructed to "maintain long-run growth of the monetary and credit aggregates commensurate with the economy's long-run potential to increase production" (Section 2A, Federal Reserve Act). That congressional mandate, however, is a weak reed upon which to rest sound monetary policy in a world of government fiat money not subject to any enforceable monetary rule. In 1978, the Humphrey-Hawkins Act required the Fed to set targets for monetary aggregates and report those benchmarks to Congress twice a year. There was no penalty if the FOMC failed to hit its targets, but the Fed would have to explain why (P.L. 95-523, Sec. 108 (a)). The reporting requirements expired in May 2000 and the Fed no longer pays much attention to the money supply. Instead, the Feďs main policy instrument since the mid-1980s has been the fed funds rate (i.e., the overnight rate at which member banks lend to each other). This article examines the relationship between Fed policy and presidential power in a fiat money regime in which Congress has delegated significant power and discretion to the Fed. By making the Fed responsible, but not accountable, for achieving full employment and price stability, Congress can shift blame to the Fed when it fails to meet those objectives. In their study of the political history of the relationship between the Fed and Congress, Binder and Spindel (2017) argue that the relationship is one of "interdependence" and that Fed independence is a "myth." The fact that Congress has given the Fed increased power and discretion means that Congress is evading its constitutional duty to safeguard the value of money and, at the same time, opening the door for presidential jawboning. As Robert Weintraub, staff director for the House Subcommittee on Domestic Monetary Policy from 1976 to 1980, argued: By sanctioning "short-run money market myopia"-that is, lowering the short-run policy rate by expanding the money supply-"Congress weakened its own hand in supervising monetary policy and strengthened the hand of the Executive." Moreover, "money market myopia fitted harmoniously with administration concerns about financing the government's deficits" (Weintraub 1978: 359). He concluded that, without a credible monetary rule, "the President's objectives and plans will continue to be the dominant input in the conduct of monetary policy" (ibid.: 360). Consequently, in the absence of a credible/enforceable rule, money supply targets are insufficient to overcome presidential ambitions to push for accommodative monetary policy, keeping rates low to finance deficits and stimulate production, at least in the short run. Of course, a strong leader in the White House could push for sound money, as did President Eisenhower; and a strong leader at the Fed, such as Paul Volcker, could do likewise. For the last 25 years, from President Clinton through President Obama, criticism of Fed policy has usually been in private. But there has been a sea change with President Trump, who has been highly critical of Fed Chairman Jerome Powell for raising rates in 2018, especially the December increase in the target range by 25 basis points to 2.25-2.50 percent (see Smialek 2019). With tensions rising between the White House and the Fed, and with the Fed examining its strategy, tools, and communication practices, it is a good time to take another look at Fed "independence," the relationship between the Fed and president, and the case for a monetary rule to guide Fed policy and reduce the uncertainty inherent in a discretionary government fiat money regime. Legally, the Fed is independent, but in practice that independence is continuously tested by political pressures for using accommodative monetary policy and credit allocation to win votes. An examination of the evidence reveals that presidents tend to get the monetary policy they desire. The adoption of a rules-based monetary regime could help limit interference in the conduct of monetary policy and improve economic performance.