Effective personnel are important. But even the best Fed governors cannot do right by our economy without political‐legal institutions that reliably support competitive trade wherever it might lie. Recently we took an important step to improve the rules of the game for both our monetary policymakers and Congress. We marked up three bills that will (1) reduce growth‐killing uncertainty that continues to undercut the efficacy of our monetary policies; (2) sweep out the Fed’s growth‐killing balance sheet distortions; and (3) stop relying on the Fed to spend money that we do not have, and start holding Congress accountable for America’s credit policy.
As the legislative process moves forward, we are motivated by the simple truth that, if monetary policy does not work, then our economy cannot work. We know that some forms of monetary policy are clearly better than others. Throughout history, a number of commodities have served as money. Even stone wheels at the bottom of the Pacific Ocean have been respected as a legitimate exchange medium.
And imagine the exchange medium that people might have used not too long ago where we sit today. Certain types of tobacco leaves could have served as money, and we would have spent more time and effort examining whether a particular leaf would reliably store value than we would enjoying that value. The high cost of transacting itself would have slowed or altogether stopped markets from helping goods and services (which include labor) find their most promising opportunities.
Monetary policy can appear complicated, but unless we appreciate its foundational role in producing and delivering the economic opportunities that can and should be readily available across our country, we will continue to fall short of our true potential. Our work on the Committee is dedicated to making sure that does not happen.
Two years ago, my colleague on the House Financial Services Committee, Representative Bill Huizenga of Michigan, spoke at this conference on the eve of our Fed Oversight Reform and Modernization Act or FORM Act. Shortly thereafter, my colleagues and I passed that legislation through the full House of Representatives. This time, we have a chance to move our legislation even further. Our goal now is not only to move a solid set of monetary policy reforms out of the House, but also to place it on President Trump’s desk for signature.
Motivation for and Details of Markup Bills
We marked up three reforms that are strong on policy and capable of attracting both deep and broad support. We started by introducing a simple but important strategy to improve how the Fed communicates monetary policies.
Monetary Policy Strategy
Better communication may sound boring. But it is key to reducing growth‐killing policy uncertainty that, according to recent Fed research, creates a significant drag on our economy.1 Our legislation brings greater transparency to how monetary policy reacts to economic changes so that households and businesses have the information they need to make productive decisions.
The Federal Open Market Committee (FOMC) characterizes its conduct of monetary policy as “data dependent.” In doing so, however, it leaves households and businesses uncertain about what data matter and how they matter. By providing for the annual adoption of a monetary policy strategy of the Fed’s own choosing, as well as a small set of reference policy rules, our legislation will reduce that uncertainty and provide more reliable and stronger support for a dynamic economy.
During our Committee’s last Humphrey–Hawkins hearing,2 Federal Reserve Board Chair Yellen expressed interest in working with our Committee to codify a simple and effective framework for a more transparent and accountable monetary policy. By adopting the best of proposals from both sides of the aisle, this framework promises to reliably support a stronger economy that works for everyone. Testifying before our monetary policy subcommittee, economist Joseph Gagnon from the Peterson Institute shared the following observation: “The best strategy is for the Fed to use various rules in assessing the stance of policy. Whenever it deviates noticeably from popular rules, the Fed should explain clearly why it is doing so.”3 Our Monetary Policy Transparency and Accountability Act provides for exactly the type of framework that Gagnon and other highly regarded witnesses from both sides of the aisle have advocated during our extensive hearings.
Moving this legislation into law is essential to minimize growth‐killing uncertainty and reliably support the kind of economic dynamism that each of our diverse constituencies needs to engage the opportunities they deserve.
A Monetary Policy Balance Sheet
In addition to reducing policy uncertainty, we also address the Fed’s distortionary balance sheet. We do so by establishing a Fed‐Treasury asset swap—one that will transfer unconventional assets to the Treasury in exchange for an equally valued set of Treasury securities. Almost half of today’s Federal Reserve balance sheet continues to reflect the Fed’s emergency expedition into favoring some asset prices at the expense of others.4 In addition to creating asset price distortions, continuing this expedition increases threats to monetary policy independence. Our asset swap facility sets the ship straight, leaving the Fed with the assets it needs to conduct monetary policy and requiring our government’s fiscal principals to manage credit‐related assets.
As I mentioned earlier, an efficient monetary policy helps goods and services readily find their most promising opportunities. To be sure, realizing this ideal is hard, even under favorable conditions. It becomes harder still when central banks step beyond their monetary policy role and into the political realm of favoring some credit prices over others (as the Fed has done, for example, by purchasing almost $2 trillion of mortgage backed securities during and after the financial crisis).5
Economists of different stripes shared considerable concerns with our Committee about this unfortunate development. Testifying as a minority witness before our monetary policy subcommittee, MIT economist Simon Johnson observed that “we’re all agreeing … that fiscal policy infrastructure is the responsibility of the fiscal authority, which is that Congress in the United States … it is not the responsibility, and should not become the responsibility of the Federal Reserve.”6
Our Independence from Credit Policy Act promotes a more resilient financial system and more productive allocation of credit. It provides for an orderly return of the Fed’s balance sheet to, as Chair Yellen has described, “a primarily treasury‐only portfolio.”7
Congressional Accountability for Emergency Credit Facilities
Finally, our Committee voted out a framework for congressional approval of emergency lending. Time and again, Americans have watched their Federal Reserve stretch its mandates beyond the breaking point, with the predictable result of increased financial fragility and decreased economic opportunity.
Politicians and advocacy groups from both sides of the aisle agree that doing better requires a brighter line between conventional monetary policy and emergency credit policy. Following the introduction of Warren‐Vitter, the president and CEO of Better Markets, Dennis Kelleher, warned: