The Marriner S. Eccles Federal Reserve Board Building – Washington, DC
On July 10, the House Financial Services Committee held a hearing which explored ideas of reforming the Federal Reserve on the 100th anniversary of its founding. The hearing centered on new legislation, the Federal Reserve Accountability and Transparency Act (H.R. 5018), which is the latest in a series of bills (including the recently mentioned Centennial Monetary Commission Act) introduced this term which are targeted at reforming the Federal Reserve. Much of the event’s discourse involved the perceived need for the Fed to adopt a more rules-based policy and the impact this would have on Fed activities.
Many committee members cited the benefits to having a more transparent and accountable Federal Reserve. Witnesses and Republican legislators cited several ways the Federal Reserve might be held more accountable to Congress. Some ideas included: giving the members of the Federal Reserve’s Board of Governors their own staff in order to reduce the reliance on the Chairman and his or her staff, doubling the number of times the Chairman testifies in front of Congress, and requiring the Fed to identify a monetary rule it will follow and articulate it to Congress and the American people.
Dr. John Taylor, professor of economics at Stanford University and father of the Taylor rule, was one of the witnesses in favor of a rules-based policy. In his testimony he referenced a comparison of the performance of various central banks, contrasting the economic performance of monetary regimes when they follow a rule versus when they do not. Dr. Taylor came to the conclusion that economies tend to do better when their central banking system follows a rules-based policy, and based on these findings, he argued it would be best for the Fed to publish a rule they would follow so that all Americans could understand what policies the Fed is likely to pursue and how these would affect the markets.
Another witness, Dr. Mark Calabria of the Cato Institute, expressed concern over the apparent collusion between the Federal Reserve and politicians, noting that several individuals have left the executive branch to work for the Fed. He was also concerned about the level of secrecy the Fed possesses when it comes to matters of monetary policy due to the opportunities it presents for corruption. He noted in his testimony that he would like to see more regulation concerning who can serve on the Federal Reserve, stating that he would be in favor of banning ex-government officials and Wall Street bankers from serving at the Fed until after they had been out of those positions for a certain amount of time.
As I have written before, the Federal Reserve does not always do a good job fulfilling its responsibility of price stability, often trusting statistics which fail to tell the true story of many Americans’ struggles. A more transparent Federal Reserve, one which is beholden to a rules-based policy, would be more efficient and beneficial to the American people as well as less prone to political maneuvering. Thankfully, it would seem many congressional leaders are beginning to agree.
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