Hensarling to Yellen: “Follow a Rule”
“The overwhelming weight of evidence is that monetary policy is at its best in maintaining stable prices and maximum employment when it follows a clear, predictable monetary policy rule.”
Jul 16 -
House Financial Services Committee Chairman Jeb Hensarling (R-TX) delivered the following opening statement at today’s full committee hearing with Federal Reserve Chair Janet Yellen on monetary policy and the state of the economy:
We welcome Chair Yellen for another Semi-Annual Humphrey-Hawkins appearance before our Committee today.
Her appearance performs double duty and represents the 11th hearing of our committee’s Federal Reserve Centennial Oversight Project.
As all members know, last week we held a legislative hearing on the first piece of legislation to arise from the project, namely the Federal Reserve Accountability and Transparency Act co-authored by Mr. Huizenga and Mr. Garrett. Not surprisingly, its introduction was met with howling protests and apocalyptic visions from my Democratic colleagues. Regrettably, such a reaction has become commonplace on our committee. With few exceptions, my Democratic colleagues have proven they do not wish to legislate, nor do they wish to conduct oversight. It causes many to wonder why they ran for Congress in the first place. And the answer? They apparently wish to be defenders and apologists of the status quo.
But with the “real” unemployment rate at 12.1 percent, 46 million Americans dependent on food stamps, real median income having fallen every year of the Obama Administration, the status quo is unacceptable. Additionally, when the Federal Reserve helps precipitate the financial crisis with loose monetary policy, selectively intervenes in distinct credit markets, facilitates our unsustainable national debt, blurs the lines between fiscal and monetary policy and has its power vastly expanded, the status quo is unacceptable.
A dramatic increase in power calls for a corresponding increase in accountability and transparency and that is precisely what the FRAT Act does.
The overwhelming weight of evidence is that monetary policy is at its best in maintaining stable prices and maximum employment when it follows a clear, predictable monetary policy rule. I believe the period of the Great Moderation between 1987 and 2002 attests to this proposition. Had a clear, predictable monetary policy rule like the Taylor Rule been in place throughout the last decade, it is likely the financial crisis would have been avoided in the first place, or at least downgraded to a garden variety recession.
The FRAT Act in no way, shape or form dictates monetary policy. Anybody who maintains otherwise either hasn’t read the act, doesn’t understand the act or regrettably they are trying to mislead others.
After the passage of the FRAT Act, if the Fed wants to conduct monetary policy based upon viewer text messages from the “America Idol” television show, it will retain the unfettered discretion to do so. If the Fed wants to conduct monetary policy based upon a rousing game of “rock, paper, scissors” on odd Tuesdays at the FOMC, it will retain the unfettered discretion to do so. The Fed can set any rule it wishes. It can change the rule anytime it wishes. It can deviate from the rule anytime it wishes. Under the FRAT Act, it simply has to report and explain this to the rest of us. That’s what transparency and accountability are all about.
For those who claim this somehow imposes upon the Fed’s independence, I note the Fed Chair testifies before our committee and our Senate counterpart twice a year. The Fed Chair meets with the Treasury Secretary once a week. And dare I mention the continuing revolving door between Fed officials and Treasury officials. The threat to the Fed’s independence does not come from the legislative branch; it comes from the executive branch.
Again, I reiterate “this has nothing to do with the FOMC deliberations or micromanagement of daily Federal Reserve operations. The Fed just wants to keep the curtains closed and keep any outside eyes from reviewing how well -- or how bad -- its biggest policies are implemented. Who knows whether the Fed’s engine needs a tune-up if no one will let the mechanic look under the hood?”
Oh, by the way, that’s not my quote. It is from the former chairman of this committee, Henry B. Gonzalez, whose portrait sits to my right and who very well may have been the single-most liberal Democrat to ever chair this committee. My how the times have changed.
As our witness Dr. Mark Calabria of the CATO Institute testified last week, the reason it is important for the Fed to reveal its rule or operating model is “so that it can be examined and tested by those outside the Fed. Only under such examination can we learn how the model captures the real world.” The Fed has yet to corner the market on PhD economists or monetary policy experts. Quite simply, the Fed’s work should bear the scrutiny and critical examination of others.
With respect to the other portions of the FRAT Act, it remains an open question whether the Fed should serve any role as a prudential regulator. But regardless of the answer to that question, the Fed should no longer be permitted to hide its prudential regulatory actions behind its monetary policy independence cloak. This is particularly true when we consider the Fed’s sweeping powers under Dodd-Frank to control an ever-increasing share of the American economy. When it comes to prudential regulations, it is clearly time to hold the Fed to the same openness and transparency that we require of other federal agencies. This includes mandatory cost-benefit analysis, also known as common sense.
Finally, many have wondered about the Fed’s view of the FRAT Act. I have not. During my Congressional tenure, I have yet to encounter one federal agency that has requested less power, fewer resources or more accountability. I doubt the Fed will be the first.