At a House Financial Services Committee hearing last Thursday, Fed Chair Janet Yellen and a Republican Congressman had a testy exchange that shows just how uninformed and dangerous GOP monetary policy can be.
Yellen explained her opposition to a Republican-sponsored bill that would allow Congress to exert additional political pressure on the Federal Reserve, calling the legislation a “grave mistake.” One of the bill’s authors, Rep. Bill Huizenga, wasn’t amused. “Have you read my bill?” he asked Yellen, who was giving her semi-annual testimony on the state of monetary policy.
The Garrett-Huizenga legislation would ask the Fed to use a mathematical rule in setting monetary policy. Under such a rules-based monetary policy, the Fed would simply plug in different economic statistics to a formula and set the interest rate based on it. The most famous example of a rules-based monetary policy is the Taylor Rule, which sets the interest rate based on GDP and inflation. Under the Garret-Huizenga bill, if the Fed deviated from the rule, the chair would have to testify before the appropriate committee to explain why they did so.
"I think it's very important to understand,” Yellen said, “that had we followed, in the aftermath of the financial crisis, the recommendations of any of the simple rules that are widely discussed, the outcomes would have been even more disappointing than what we experienced." Yellen also noted that while the Garrett-Huizenga legislation does not require the Fed to follow a certain rule, it would undermine central bank independence by forcing the Fed chair to appear before a congressional committee. “I believe that global experience has shown that we have better macro-economic performance when central banks are removed from short-term political pressures,” she added.
Republicans have been 100 percent wrong on monetary policy throughout the Obama presidency. They have frequently critiqued Fed policy, predicting it would cause high inflation. That has not happened, even though the Fed has ignored the GOP’s dire warnings and kept interest rates at zero. Huizenga and many of his Republican colleagues now want to assert even more control over the Federal Reserve by attempting to lock it into a rules-based policy. Or else ensure the Fed chair will have to report to Huizenga and Co. directly.
But just a few minutes after Huizenga contemptuously asked Yellen whether she had read his bill, he revealed why he should have no say in monetary policy. Huizenga implored Yellen to support his legislation so that Congress could have oversight (read: control) over the Fed’s policy, to which the Fed chair continued to push back. "I'm not aware of any literature that established that adopting a rule...whether [the central bank] makes it public or not, is the most desirable way to run monetary policy," she said. Not to be outdone, Huizenga interjected, “Might want to talk to the Europeans about that and a lot of other economists as well."
If Huizenga is looking to Europe as a comparison, he’s way off. First, the Europeans (I assume Huizenga means the European Central Bank) don’t operate with a rules-based monetary policy. Even more, the recovery has been much weaker in the Eurozone than in the United States, precisely because the ECB became too worried about inflation in 2011 and prematurely raised interest rates. They soon corrected that mistake and are now considering undertaking large-scale asset purchases, which the Fed has done nearly constantly since 2008. Between the Fed and ECB, there’s no debate about who was more successful at designing policy after the financial crisis.
How about economists? Do they support the Garrett-Huizenga bill? The Chicago Booth School of Economics asked 44 economists whether the bill would improve monetary policy. Not a single one said it would. Five economists chose not to answer and five were uncertain about its effects. The remainder all disagreed that it would improve monetary policy. When weighted by each expert’s confidence, the results are even more damming:
Huizenga’s comments to Yellen weren't just obnoxious and wrong. They also showed how dangerous a GOP president could be for monetary policy. With Republicans blocking more fiscal stimulus, the Fed’s commitment to a zero-interest-rate policy and willingness to use unconventional tools like large-scale asset purchases to spur economic growth has been a major reason why we’ve had any recovery at all. If Huizenga and his Republican colleagues had their way, those policies would have ended long ago—and our economy would be much worse shape.