Some Republicans Want To Strip Fed Of Its Mandate
RENEE MONTAGNE, host:
The Federal Reserve is under attack. Some Republicans want to strip it of part of its mandate.
To find out more, we turn now to our Fed watcher and frequent guest David Wessel. He's economics editor of The Wall Street Journal.
Mr. DAVID WESSEL (Economic Editor, The Wall Street Journal): Good morning, Renee.
MONTAGNE: So just a little background, David - what's the Fed's job now and what do the Republicans want to change?
Mr. WESSEL: Well, for more than 30 years, Congress has charged the Fed with aiming at two things: maximum employment and stable prices. Now a few Republicans, Bob Corker in the Senate, Michael Pence in the House, are reviving an old proposal and say they want to strike the unemployment part of the mandate and make clear that fighting inflation is Fed job number one.
MONTAGNE: So why now? Why try to do this now?
Mr. WESSEL: Well, it does seem kind of strange timing, with unemployment at 9.6 percent and not expected to fall anytime soon. The Republicans who are doing this are unhappy with the Fed's recent decision to buy $600 billion worth of Treasury bonds. The Fed justified that by saying unemployment was too low -unemployment was too high and inflation was too low. The Republicans say they are worried that the Fed is making a mistake here, is going to overdo it and create more inflation than it wants, so it wants to make clear that it expects the Fed to keep inflation low and let something else worry about unemployment.
MONTAGNE: But would changing the law make any practical difference?
Mr. WESSEL: That's a good question. It's very hard to see any instance in the past several years, including this one, where a different mandate would've produced or higher or lower interest rates. Ben Bernanke, the Fed chairman, says the reason he is buying, or one reason he's buying $600 billion worth of bonds is that inflation in his mind is too low. It's below the two percent that he defines as price stability. Mr. Bernanke and Mr. Greenspan before him have always argued that the best way to get to maximum employment in the long run is to aim for price stability.
But there are some academics and other analysts who say that at a time like this, when the Fed is experimenting so much and the markets are worried about the Fed overdoing it, that the markets would be calmer and maybe the bond market would be happier and long-term interest rates lower if people knew that the Fed had a clear mandate in the long run not to let inflation get out of control.
MONTAGNE: You know, David, how much of this move is based on an economic argument and how much of it is, you know, frankly, just politics?
Mr. WESSEL: Well, it's both here. There's an economic case to be made, it's been made by - in forums at the Federal Reserve and in academic monetary, economics departments for years - but I think it's surfaced now really because of politics. The Fed has once again found itself a whipping boy for what's wrong with the economy. A number of Republican economists; Sarah Palin, the potential presidential candidate, are beating up on the Fed and saying that they're doing the wrong thing, and this has become a vehicle for them to express their anger.
MONTAGNE: And what has Fed chair Ben Bernanke been saying about this?
Mr. WESSEL: Well, in a speech in Boston a couple of weeks ago, he defended the dual mandate. He said if the Fed aimed exclusively at keeping unemployment low, we'd get too much inflation, but if they aim exclusively at inflation, we'd have more and deeper recession. So he's in favor of keeping the mandate as it is. He argues, as many other economists do, that over the long run the Fed can only influence inflation. But in the short run its policies have an impact on both unemployment and inflation, and that's as it should be. After all, even banks with an inflation-only mandate tend to worry about unemployment too.
MONTAGNE: David Wessel, economics editor of The Wall Street Journal.
Mr. WESSEL: You're welcome.
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