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Hensarling: Economic Growth Requires ‘Transparent Policy Strategy’ From Fed

Washington, Jul 12 -

House Financial Services Committee Chairman Jeb Hensarling (R-TX) delivered the following opening statement at today’s hearing with Federal Reserve Chair Janet Yellen on monetary policy and the state of the economy:

Since we last convened to take Chair Yellen’s testimony on monetary policy, there have been encouraging economic headlines.  Confidence is up.  Headline unemployment remains low, as does inflation.  But the headline unemployment rate still rests too much on an incredibly low labor participation rate and, regrettably, high disability payment participation rates. 

Both paychecks and savings for working Americans still have considerable room to grow after 8 years of distortionary economic policy under the previous administration.

Fortunately, on the fiscal front, help is on the way.  House Republicans have passed both the American Health Care Act to lift the burden of Obamacare from our economy and the Financial CHOICE Act to end bank bailouts and unleash trillions of dollars of capital sitting on the economic sidelines due to Dodd-Frank.  These are landmark pieces of legislation.  In the months to come, the House will vote on a fairer, flatter, more competitive tax code that will undoubtedly bring us a far healthier and dynamic economy.  And the Trump Administration is busy rolling back rules that harm our economy as well.

Monetary policy must do its part, as well.  I am highly encouraged that Chair Yellen and her colleagues seem to be on a track toward monetary policy normalization.  Keeping interest rates artificially low for too long was a key contributing factor to the last crisis.  Let’s hope it does not prove to be a key contributing factor to the next.

What is most desirable for long-term economic growth is for the Fed to set out an easily discernable and transparent policy strategy to achieve its mandate and, but for highly exigent circumstances, to stick to it.  Forays by the Fed into fiscal policy, specifically credit allocation, cannot and should not be permitted.

Assuming press reports are accurate and the Fed will soon commence an orderly wind down of its balance sheet, this is more good news.  Both the size and composition of the balance sheet remain alarming.  Intervention into distinct credit markets like mortgage backed securities is inherently fiscal policy, not monetary policy.  Already there is talk of having the Fed bail out student loans and public pension funds.  I, again, maintain if we are not careful we may wake up one day to find our central bankers have instead become our central planners.

What has allowed the Fed’s foray into credit allocation is the policy of paying interest on excess reserves, and today, paying a premium over market.  Interest on “required” reserves was meant to counteract an implicit tax.  Interest on “excess” reserves should not become a permanent tool of monetary policy.  Normalization would suggest, after setting the level of reserves, short-term interest rates be set by market forces.  But today they are set from the top down by an administered rate paid on excess reserves, which again, is a premium rate resting on uncertain legal authority.

Forays into credit allocation and fiscal policy threaten the Fed’s independence and our economic future. Let’s hope the normalization has truly begun.