Hensarling: Fed Reforms Are Needed…Fed Reforms Are Coming
February 25, 2015 -
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:
As Chair Yellen delivers her semi-annual report today, we have an opportunity to examine the state of the Fed’s balance sheet. But it is the “Precarious State of Family Balance Sheets” that must be foremost on our minds. That, coincidentally, is the title of a recent report by the Pew Charitable Trusts which rightly concludes that “many American families…are walking a financial tightrope.”
Since the president embarked on his economic program, middle income families have found themselves with smaller paychecks, smaller bank accounts and farther from financial independence. Millions have become so discouraged trying to find a job they have simply given up and left the work force.
Although we have happily seen some recent improvement in our economy, Americans are still mired in the slowest, weakest recovery of the postwar era – this in spite of the single-largest monetary stimulus in America’s history.
Why is this recovery so anemic? No doubt Obamacare, Dodd-Frank and the other roughly $617 billion in new regulatory costs imposed by the administration. This is something monetary policy cannot remedy.
On top of this is the burden of $1.7 trillion in new taxes that fall principally upon our engines of job growth: small businesses, entrepreneurs and investors. Monetary policy cannot remedy this, either.
Then there’s the doubt, uncertainty and regulatory burden that grows as more and more unbridled, discretionary authority is given to unaccountable government agencies. Although monetary policy cannot remedy this, it can help.
During the most successful periods of our Fed’s history, the central bank appeared to follow a clear rule, methodology or monetary policy convention. Today, however, it favors a more unpredictable and somewhat amorphous forward guidance – which creates uncertainty.
For example, just moments after the FOMC released its policy statement on December 17, the Dow surged over 300 points -- seemingly based upon nothing more than the substitution of the word “patient” for the phrase “considerable time.” And when Chair Yellen’s predecessor once publicly mused about the mere possibility of tapering Quantitative Easing, markets took a deep dive.
Thus, there does not appear to be all that much guidance in the Fed’s forward guidance. As one former Fed president recently wrote: “Monetary policy uncertainty creates inefficiency in the capital market. The FOMC gives lip service to policy predictability but its statements are vague…The FOMC preaches that policy is data dependent but will not tell us what data and how.”
Many prominent economists believe the American people will enjoy a healthier economy when the Fed begins to adopt a more predictable method or rules-based monetary policy- one of its choosing.
Opponents argue any reforms threaten the Fed’s monetary policy independence, but the greatest threat to that independence comes from the executive branch, not the legislative branch. While the Federal Reserve Chair testifies publicly before this committee twice a year, she meets weekly with the Treasury Secretary in private. And for decades there has been a revolving door between Treasury officials and Fed officials which continues even today.
With respect to reform, accountability and transparency on the one hand, and independence in the conduct of monetary policy on the other, these are not mutually exclusive concepts.
After Dodd-Frank, a quadrupled balance sheet, massive bailouts and unprecedented credit market interventions, the financing and facilitation of trillions of dollars of new national debt this is clearly a very different Fed.
Chair Yellen, I will listen very carefully to constructive suggestions that improve Fed reform ideas, but I for one believe Fed reforms are needed and I for one believe Fed reforms are coming.