The Fed’s Eccles Building under construction in 1937. Some Republicans think it needs more than a face lift. (Library of Congress/Harris & Ewing)
If you thought the retirement of congressman Ron Paul (R-Tex.) had quieted Republican fervor for opening up monetary policy making to congressional scrutiny, think again. On Tuesday, two House Republicans introduced the Federal Reserve Accountability and Transparency Act, a bill that goes far beyond even Sen. Rand Paul’s (R-Ky.) wildest audit the Fed dreams.
The bill, introduced by Reps. Bill Huizenga (Mich.) and Scott Garrett (N.J.), requires the Federal Open Market Committee (FOMC) to embrace a policy formula (or rule) for setting interest rates, requires the Fed to defend any policy rule that deviates from the “Taylor Rule,” and mandates Government Accountability Office audits to ensure Fed compliance with its rule. In short, it’s audit the Fed on steroids. Of course, even if the House were to pass the bill, it would never see the light of day in a Democrat-controlled Senate.
Still, the measure is worth a brief look because it offers a window into Republican views about the Fed and its autonomy to formulate monetary policy. Two elements of the measure stand out:
First, the bill crosses the boundary between setting the Fed’s policy goals and determining its policy instruments. Most congressional efforts to influence monetary policy only do so indirectly — for instance setting the Fed’s mandate or altering its governance structure. But the bill walks right up to the point of setting the Fed’s choice of policy instruments. To be sure, the bill doesn’t mandate that the Fed follow the Taylor Rule, but deviations from the Taylor Rule under the bill must be justified to congressional committees and changes are subject to review by Congress’s watchdog, the GAO. Republican sponsors of the bill want to rein in the Fed’s discretion in formulating monetary policy; in doing so, they suggest that central bank independence should be conditional on Congress’s view of the Fed’s performance. There is certainly historical precedent for heightened congressional intervention in the making of monetary policy (Democratic Congresses in the early 1930s come to mind). But contemporary central bankers have long argued that the balance between the Fed’s autonomy and its accountability to Congress should weigh heavily in the Fed’s favor.
Second, the bill goes much further than rival GOP measures, such as Rep. Kevin Brady’s Sound Dollar Act proposal. Granted, the Brady bill flirts with putting the U. S. back on the gold standard. But its other provisions generally seek to influence monetary policy indirectly — for example by establishing a single price stability mandate and giving all 12 reserve bank presidents permanent votes on the FOMC. In some ways, the Brady bill is in keeping with past congressional efforts to rein in the Fed — emphasizing changes to goals and governance rather than policy instruments.
Why dwell on bills that won’t pass a Congress divided and polarized along party lines? Two reasons are worth considering.
First, as the figure below suggests, congressional attention to the Fed tends to be counter-cyclical, rising in tougher economic times and waning as the economy recovers. Signals from Capitol Hill are no doubt taken seriously by central bankers: such measures potentially signal greater scrutiny of the Fed’s policy choices.
The figure juxtaposes the number of bills addressing the powers of the Federal Reserve against the “misery index” that captures inflation and unemployment rates. Chart by Sarah Binder and Mark Spindel.
Second, these dead-end legislative efforts are important reminders that the Fed’s autonomy is protected in part by congressional deadlock over most of the big issues of the day. But divided government won’t last forever. Unified Democratic control of Congress helped to produce Dodd-Frank, a landmark measure that imposed greater transparency on the Fed and slightly clipped its emergency lending powers. Unified Republican control could also bring challenges to the Fed’s autonomy.
Anticipating how a future GOP majority might view the Fed seems worth considering now, particularly if the far right’s hostility to the Fed continues to dominate its legislative party.