Discussion and debate about new policy rule legislation continued during the past week. I replied to Alan Blinder’s article, “An Unnecessary Fix for the Fed,” published in the Wall Street Journal last Friday (July 18). I show that Alan’s article was actually criticizing a straw man of his own making, not the proposed law itself. His main argument is that the legislation “seeks to intrude on the Fed’s ability to conduct an independent monetary policy, free of political interference.” I anticipated and refuted this argument in an article, “How to Spark Another ‘Great Moderation,’” published in Wall Street Journal on July 16. As I stated there, the legislation is very clear that “the Fed, not Congress, would choose the rule and how to describe it” and “since the Fed chooses its own rule, its independence is maintained.” My response goes into more detail.
Another example where the commentary does not address the actual bill is a blog at The Economist which states that “The legislation would require the Federal Reserve to set interest rates according to a Taylor rule.” That’s incorrect. There is nothing in the bill that says that. Again the Fed would choose its own rule or strategy and also choose how to describe it to the Congress and the American people. I also note that back in 2007 The Economist was one of the first publications to use the Taylor rule to point out the problems with deviating from rules-based policy leading up to the financial crisis. The new writers have now adopted a different view.
The Economist blog post also refers to an opinion poll of a group of economists who disagree with provisions in the new bill. I would note that this is the same opinion poll of economists who argued that the stimulus package worked, a issue about which other economists disagree. As with the effectiveness of the stimulus there are plenty of economists who disagree with the economists in that poll on the new bill.
There is a clear precedent for the type of congressional oversight in the new bill. During another period of poor economic performance in the late 1970s the Federal Reserve Act was amended to require that the Fed report the ranges for the future growth of the money supply, but these requirements were removed from the law in 2000. The requirements did not reduce the Fed’s independence, though initially the Fed vigorously protested the proposed legislation. In fact many judge that the 1980s and 1990s were a time when the Fed regained its de facto independence. That could well happen again if the new bill were passed into law.