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Subcommittee Examines Impact of Monetary and Fiscal Policy on Price Stability and Economy

Washington, Jul 20 -

The Subcommittee on Monetary Policy and Trade held a hearing today to discuss the impact of monetary and fiscal policy on price stability and the economy. In particular, the hearing examined the interaction between U.S. fiscal policy and monetary policy decisions made by the Federal Open Market Committee (FOMC) at the Federal Reserve.

“A Federal Reserve that has taken on the authority to decide where to spend taxpayers’ money weakens the independence of monetary policy, accommodates our unsustainable fiscal policies, and distorts markets,” said Subcommittee Chairman Andy Barr (R-KY).  “A full eight years out of recession, and America’s typically resilient economy has yet to fully rebound. A more accountable and disciplined monetary policy would go far to get us back on track.”

Key Takeaways from the Hearing

• American economic opportunity suffers when monetary policy turns into credit policy.

• Exiting unconventional credit policies and returning to a smaller Treasuries-only balance sheet can support better economic decisions for households and businesses, and strengthen monetary policy independence.

Topline Quotes from Witnesses

“Since 2003 the Fed has always set its primary credit rate ‘above the usual level of short-term market interest rates.’ Since the Fed began paying interest on reserves it has also deliberately set its primary credit rate above the IOER rate. The Fed has thus found a way by which to claim, with an implicit appeal to Chevron deference, that its IOER rate settings have after all been consistent with the requirements of the 2006 law!” – Dr. George Selgin, Senior Fellow and Director, Center for Monetary and Financial Alternatives, The Cato Institute

“The reality is monetary policy cannot create permanent jobs, improve educational attainment or skills, permanently reduce unemployment of the semi-skilled, or raise productivity or boost real wages. Rather, monetary policy is an aggregate demand too. The major sources of underperformance involve structural challenges that are beyond the Fed’s ability to address. Yet in recent years, there has been excessive reliance on the Fed. All too frequently, analysts and observers opine ‘fiscal policy is dysfunctional so the Fed has to ease policy’. This assumes that monetary policy and fiscal policy are two interchangeable levers. They are not. Monetary policy is not a substitute for fiscal policy. Monetary policy controls interest rates and the amount of money in the economy, which influences aggregate demand and longer-run inflation.” – Dr. Mickey Levy, Chief Economist for Americas and Asia, Berenberg Capital markets, LLC

“Basic economic reasoning tells us that monetary policy actions have fiscal consequences…The message is: to successfully reduce inflation, tighter monetary policy necessarily requires tighter fiscal policy at some point. That fiscal response is essential for the Fed to be able to control inflation.” – Dr. Eric M. Leeper, Economics Professor, Indiana University Bloomington