U.S. Representative French Hill, Republican of Arkansas and chairman of the U.S. House Committee on Financial Services, announced earlier this week the formation of the Monetary Policy, Treasury Market Resilience, and Economic Prosperity Task Force. According to Mr. Hill’s statement:
“The Committee’s new Task Force will conduct hearings looking into issues relating to monetary policy, the Federal Reserve’s dual mandate, analyze the role and responsibility of the Federal Reserve, and examine the impact of fiscal and monetary policies on Treasury debt markets. I look forward to the Task Force’s Chair, Rep. Frank Lucas, and our members working to craft policies that ensure the U.S. dollar remains the world’s reserve currency and ensure price stability which leads to higher productivity, less uncertainty, and sustained economic prosperity for all Americans.”
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12 USC 225a provides the statutory mandate for monetary policy. The statute reads as follows:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
The dual mandate Mr. French referred to in his statement is really a triple mandate. The media and politicians tend to leave out the “moderate long-term interest rate” part of the mandate.
Congress’ role in monetary action plan making is pretty limited under the U.S. Constitution. Under Article I, Section 8, the Congress shall have the power to borrow money on the credit of the United States. The Congress also has the power to coin money, regulate the value thereof, and of foreign coin, and fix the Standards and Measures.
Mr. Hill believes that the Federal Reserve has gone off the beaten path of making monetary policy. In his statement he alluded to the distractions of other mandates that force the Federal Reserve to take its eye off the price stability ball. Mr. French, at least in his statement, gives the impression that there should be a single mandate, the maintenance of the level of prices faced by consumers.
I would think that the Congress would want to see a rate of change in prices that sustains continued demand for goods and services thus generating taxes needed by the government to sustain itself. That rate of change in price levels should also encourage capital to move into U.S. securities, especially U.S. Treasuries. Rising price levels are not necessarily a bad thing especially if demand for consumer goods is inelastic (unresponsive to price increases) and investors see increased returns to capital.
Over in the Executive branch, the incoming Trump administration touts a weaker dollar that it hopes will create a market for less expensive American-made product. It will need help from a Federal Reserve that resists political interference, and it is only through political interference that the Trump administration will be able to influence monetary policy.
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A Republican-controlled Congress appears ready to give the Trump administration that “tush-push” across the goal line. Between the House financial services monetary policy task force, and HR 146, a bill that would prohibit the Federal Reserve from paying interest on reserve balances held at a federal reserve bank, Mr. Trump may have some help.
For example, the current rate at which interest is paid on reserve balances is 4.40%. If Congress were to prohibit this rate, banks would look for other places to park this money, very likely in short-term T-bills which pay around 4.23%. Incentivizing banks to invest at lower yields would weaken the dollar, just the scenario the Trump administration wants.
Congress could be the lynchpin in a political battle over monetary policy.
Alton Drew
17 January 2025
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