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Fed Reform Gains Traction in Congress

GOP chairman says current monetary policy regime is tilting the playing field in favor of Wall Street and away from average working families.

by
Rodrigo Sermeño

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December 5, 2013 - 11:12 pm
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WASHINGTON – With the Federal Reserve in its centennial year, Fed chair nominee Janet Yellen facing a confirmation vote in the Senate, and questions circling around about when the central bank will scale back its bond purchases, many policy experts and lawmakers are keen on introducing some changes to the institution.

The Fed is currently spending $85 billion a month buying financial assets in the markets to lower long-term interest rates. The program, known as quantitative easing (QE), has quadrupled the Fed’s balance sheet to $3.8 trillion. The purpose of QE is to flood the banking system with cash to promote credit growth and boost the economy and employment.

Critics worry that QE is creating asset bubbles and distorting the market for government debt. They also argue that the Fed’s program risks stoking runaway inflation.

By reducing the supply of safe assets such as Treasuries, QE has forced investors to buy riskier assets such as stocks, which have enjoyed a significant rally under the program.

“While Wall Street has been roaring, Main Street has been left behind,” Chairman of the Joint Economic Committee Kevin Brady (R-Texas) said at a Cato Institute conference about the role of the Fed.

Brady said the current monetary policy regime is tilting the playing field in favor of Wall Street and away from average working families in America.

“We live now in a world that I would call the opposite market, where the job numbers come in each month or the quarterly economic numbers come in, and if they’re bad the market rallies because Fed stimulus will continue,” he said. “That can’t be the sign of a healthy economic recovery here in the United States or around the world.”

Brady said inflation might reach the economy when banks start lending all the dollars the Fed has injected into the banking system.

“Open market policies have created the conditions that might create the next financial bubble in stocks,” he said. “The excess reserves of the Fed’s balance sheets are the fuel for inflation.”

The Federal Open Market Committee, the Fed’s policy-setting body, is expected to start debating when to begin cutting back on its program over the next several meetings.

Brady said the prevailing view among lawmakers in Washington is that the Fed should manage nearly every aspect of the U.S. economy.

“Others, like myself, think the Fed should create a financial climate where the market is allowed to work,” he said, “where the Fed doesn’t pick winners and losers, especially among the financial markets, and families have confidence that their hard work and their savings will be preserved through maintaining the purchasing power of the dollar over time.”

Brady has proposed legislation that would create a bipartisan commission that would engage in a performance review of the Fed, exploring how well it has met its stated goals and what those goals should be. The Texas representative has called for everything to be on the table in the review of the Fed’s mandate.

The Centennial Monetary Commission would first start by looking backward, reviewing America’s economic performance since the Fed’s creation in terms of output, employment, prices, and financial stability.

The commission would evaluate a range of regimes, including price-level targeting, inflation-rate targeting, nominal GDP targeting, the use of monetary rules, and the gold standard.

The Fed itself emerged in 1913 from a National Monetary Commission created in the aftermath of the Panic of 1907 to examine the problems of the banking system. In 1977, Congress changed the monetary mandate of the Fed to a dual mandate for maximum employment and stable prices.

Brady’s bill is not a direct attack on the Fed that has been launched by other critics of the central bank, like former Rep. Ron Paul, who called for the elimination of the central bank altogether.

Instead, the proposal aims to be a more pragmatic approach.

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All Comments   (10)
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40 weeks ago
40 weeks ago Link To Comment
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41 weeks ago
41 weeks ago Link To Comment
There's very good reasons why the first two Central banks were dismantled.
Half measures are NO MEASURES.
41 weeks ago
41 weeks ago Link To Comment
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41 weeks ago
41 weeks ago Link To Comment
Charging into the Fed without a very good idea of what you're looking at in terms of how the Fed is structured and how it operates and knowing what you want to look at can be a very dangerous move. It always concerns me when politicians start talking about looking over the Fed because very few of them have any idea of what the Fed does and how it does it. A lot of folks think they know but reading articles and comments leaves me concerned about that level of knowledge.

My problem with Congress is it's full of bombastic bullshippers that worry about such things as the debt, gold backed dollar and cutting government spending at the worst times. there are a lot of economically stupid people in Congress. While everybody else is trying to get the economy going, those idiots are trying to crater it for some two-bit jackass idea that shouldn't even be on the agenda.

Congress gets a report at least twice a year on what the Fed is doing, sometimes more often. Why don't they ask their questions then? Most folks have no idea why the Fed is doing the QEs and even less as to why it has put all that money in the accounts of the big banks. Geithner dumped it all in the dirt when the crap hit the rotary oscillator and left the Fed to take care of the banks and the economy with zippo help from Treasury.
41 weeks ago
41 weeks ago Link To Comment
Granted that most congress-critters don't understand what the Fed does, or how. Still, some of them do, and I also note that the Fed Board is composed entirely of bankers, or of other "financial professionals". Do you really think that a Board consisting of such a narrow slice of the population will not end up supporting the viewpoint of the group it comes from. They will inevitably think that that viewpoint is "right". What is good for banks and Wall Street is not necessarily good for the Nation or it's people as a whole. The financial system needs to be sound, but it is not the be all or end all of what policy should be. Right now the Fed is not subject to effective oversight or control of the Congress, who are the elected representatives of the people. Their current policy seems, at least to this semi-educated observer, more dedicated to the welfare of the banks they represent, and to the markets, than to the welfare of the people of these United States. Inflation kills the little folk, and the huge growth of the money supply, to support and grow real estate and market bubbles, while hiding the real inflation in food, energy, rents and homes, will inevitably crush not the banks or market funds, but the lower middle class and working class little guys who these folks don't know or seriously care about.
It is time and past time that our elected representatives take a serious look at the functions, and, more seriously, the motivations of our brilliant betters on the Federal Reserve, at Treasury, and, for that matter, in the universities which grind out the so-brilliant guides.

Don't worry, they can hire their own experts who understand and can interpret the economic niceties- and the B$- for them.
41 weeks ago
41 weeks ago Link To Comment
I think a commission to look at the various questions around the Fed's mandate is a good idea. This is an important but very intimidating subject--as is shown by the dearth of comments on this article--and hearings could help to educate the public.
41 weeks ago
41 weeks ago Link To Comment
By concentrating on inflation, the Fed would ensure that the Dollar remained sound, and the economy could thrive without this insideous hidden tax that destroys jobs, devastates savings, and only enables the Left to constantly increase government spending.
41 weeks ago
41 weeks ago Link To Comment
Both in terms of averting bubble crashes that result in recessions, and in preserving the value of the dollar, the Fed's record is one of failure. But, this privately owned corporation incorporated in Delaware has proved to be a valuable resource to some.

Working for a very large bank myself, I can tell you that not having to undergo audit, as is the case with the Fed, changes everything.
41 weeks ago
41 weeks ago Link To Comment
Best deal? Get rid of the fed ASAP! All they do is pump up stocks, toss money at Goldman Sachs & prop up Wall Street. We, the ordinary people, get absolutely NOTHING from it! We are enslaved to both the feds & wall street now, & when the crash comes, you can bet your last cent that the gov't will help all of their pals & contributers on wall street, NOT us. It will be just like 2008 but worse. All the fed does is work for the bankers & wall street and their gov't pimps that go through the revolving door from the gov't to wall street & back. We the people are totally screwed. But the politicians & big shot wall street firms are completely protected as they are all too big to fail now. When the coming crash happens, game over for America as we know it. Just wait & see...
41 weeks ago
41 weeks ago Link To Comment
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