by Garett Jones

Congress holds the Fed to vague mandate standards

It's impossible for the Federal Reserve to violate its dual mandate: The dual mandate is meaningless.

Congress demands that the Fed maximize employment and minimize inflation -- but it gives the Fed zero measurement standards, zero time horizons, zero advice on how to trade off these two potentially conflicting goals.

As in so many areas of legislation, this is just how Congress wants it:

It holds the federal bureaucracy to vague standards, making it all the easier for Congress to rattle the bureaucracy's cages whenever election time comes around. Congress always retains the right to be angry, and the offending bureaucracy knows that apology is the best policy.

This is an old theme in political science made famous by Theodore Lowi in the 1970's:

Congress long ago gave up on passing actual laws in most cases, and instead passes vague legislation that says little more than "the federal bureaucracy shall do some good things while avoiding some bad things." When Congress enacted the Federal Reserve's vague dual mandate, it was business as usual.

So the mandate is meaningless, but is the Fed interpreting it the best way possible? They're getting a lot right: Inflation is lower than in the 70's, and they ended the risk of deflation that haunted the economy in 2010. Credit where credit is due.

But there's room for improvement:

The Fed could have done more in the depths of the recession, and it should be doing more now. Since 2008, the Fed has allowed total spending to shift 5 percent below its old path: That means the average American has 5 percent fewer dollars coming in to repay those loans taken out well before the bubble burst. Five percent less income means millions of bankruptcies spread out over the coming years, bankruptcies that often don't need to happen. The Fed could fix much of this if it stopped paying interest to banks that lend it money: Banks would quickly become a lot more interested in making long-term loans to businesses and families.

The Fed has additional tools at its disposal, and the economy is weak: So why aren't they doing more? A key reason: Congress. The Fed fears a backlash from inflation hawks on the Hill. And like any other federal agency, when it sees that Congress is angry, it caves. So maybe the dual mandate does mean something: It means the Fed follows every whim of Congress.

 

Available at Amazon.com:

The Fed Caves to the Whims of Congress

 

The Fed Caves to the Whims of Congress