March 7, 2012
WASHINGTON – Democratic Members of the House Financial Services Committee sent a letter to Chairman Spencer Bachus, requesting that he call a legislative hearing on a bill introduced by Rep. Kevin Brady (R-TX) which would strip the legal mandate that the Federal Reserve pursue policies that seek to sustain maximum employment.
All twenty-seven Democratic Members of the Financial Services Committee signed the letter. In their letter, they stress that they do not support the Brady legislation, but they believe that “the country would benefit from having a full discussion of this issue, now that it has been raised by various influential figures, including you.”
Last week, during a hearing on the Federal Reserve at which Chairman Ben Bernanke testified, House Financial Services Committee Chairman Spencer Bachus and other Republicans called into question whether the Federal Reserve should continue to pursue measures to increase employment.
The request is part of an increasingly heated debate between Democrats and Republicans over whether the Federal Reserve should continue to pursue policies to sustain maximum employment. Despite the fact that the U.S. is still recovering from the worst economic crisis since the Great Depression, some Republicans argue that the Federal Reserve should narrowly focus its efforts on keeping inflation low instead of balancing that goal with efforts to create jobs.
Currently, the Federal Reserve has a legal responsibility to pursue a “dual-mandate” to create the conditions for both low inflation and for high employment. The law establishing the dual mandate, known colloquially as the Humphrey-Hawkins Full Employment Act, was passed by Congress in 1978.
The bill, which will be formally introduced later this week by Congressman Brady, would eliminate the employment leg of the dual mandate, requiring the Federal Reserve to focus only on price stability.
The legislation would also restructure the Federal Open Market Committee (FOMC). The bill would give permanent seats on the committee to the twelve regional Federal Reserve bank presidents, who are chosen by regional Federal Reserve Bank directors. Those boards are composed of private citizens. Presently, four of the twelve bank presidents hold rotating positions on the FOMC and only the president of the New York Federal Reserve bank holds a permanent seat. This dramatic restructuring of the FOMC would give power over monetary policy to a group with no public accountability.
Last year, Congressman Barney Frank introduced a bill which would have yielded the opposite effect, replacing the regional bank presidents with Presidential appointees, making all twelve members of the FOMC subject to the democratic process via Presidential nomination and Senate confirmation.
Finally, the bill would require that, except in the case of a 2/3 vote of the committee, the Federal Reserve buy only U.S. Treasury bonds, effectively ending the Fed’s ability to boost the economy via programs known as “quantitative easing.”
In an article analyzing the effectiveness of fiscal and monetary policy on the recent recession, economists Mark Zandi and Alan Blinder state that these efforts combined “probably averted what could have been called Great Depression 2.0.” The authors further write that “when we divide these effects into two components—one attributable to the Fiscal stimulus and the other attributable to Financial-market policies such as the TARP, the bank stress tests and the Fed’s quantitative easing—we estimate that the latter was substantially more powerful than the former.” The Brady legislation would largely eliminate the ability of the Federal Reserve to pursue what these economists identify as the most important factor supporting the economic recovery.