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Subcommittee Examines the Fed’s Unconventional Monetary Policy

Washington, Dec 7 -

WASHINGTON – The Monetary Policy and Trade Subcommittee held a hearing on Wednesday to examine  the Federal Reserve’s departures from conventional monetary policy and how a more principled and transparent monetary policy strategy can better support economic growth going forward.

“Economic opportunity reliably increases when monetary policy adheres to its vital duty – that is, facilitating commerce, wherever it shows promise,” said Subcommittee Chairman Bill Huizenga (R-MI), “Throughout our current economic malaise, monetary policy has not only ignored this duty, it continues to ignore the consequences of ignoring this duty.”

Key Takeaways from the Hearing:

• A rules-based approach to monetary policy would increase transparency and help households and businesses make better economic decisions.
• The Fed’s overly accommodative monetary policy has masked necessary budget and spending reforms and compromised the Fed’s independence.
• By stepping well beyond the bound of simply facilitating commerce wherever it shows promise, unconventional monetary policy is distorting investment decisions and weakening economic performance.

Topline Witness Quotes:

“Monetary policy should be normalized. The Fed should transition to a sound rules-based monetary policy like the one that worked in the past while recognizing that the economy and markets have evolved. This appears to be the intent of the Fed, but normalization, or transition, is difficult in practice, and the pace has been slow and uncertain. With the policy interest rate still below appropriate levels, a key step is to begin to raise the policy rate gradually and strategically.” - Dr. John Taylor, Professor of Economics, Stanford University, and former Under Secretary of Treasury for International Affairs

“Unfortunately, over the last decade, the Fed's mandate seems to have experienced mission creep, expanding the scope for discretionary action and the opportunity for political interference. The public and the Fed talked as if monetary policy should be responsible for stock market valuations, income inequality, labor force participation rates, real wage growth, and an expanding list of other dubious objectives. Indeed, around the world it seems that central banks are being asked to solve all manner of economic ills, from fiscal crises in Europe to low productivity and structural challenges in Japan and the U.S.  I think this is a mistake and potentially dangerous for the institution and the economy.” - Dr. Charles Plosser, Visiting Fellow at the Hoover Institution, Stanford University and Former President and CEO, Federal Reserve Bank of Philadelphia

“Extending excessive monetary ease well after economic performance normalized and the Fed’s dual mandate was largely achieved has been costly. Instead of stimulating aggregate demand, monetary policies have contributed to mounting financial distortions and disincentives and are inconsistent with the Fed’s macro-prudential risk objectives. Unfortunately, the Fed and financial markets now may be beginning to pay the price for the Fed’s extended excessively easy monetary policy.” - Dr. Mickey D. Levy, Managing Director and Chief Economist, Berenberg Capital