Originally published at Menger Center.
November 19, 2015—The US House of Representatives is expected to vote this week on the Fed Oversight Reform and Modernization (FORM) Act of 2015. In response to that, Federal Reserve Chairman Janet Yellen sent a letter to the House leadership expressing her opposition to the bill. Had such an opinion been solicited by Congress through hearing testimony, it might be somewhat less objection than an unsolicited letter to Congress.
Like many executive agencies, the Federal Reserve has forgotten that its role is to do what Congress tells it to do. The Fed has flipped that around, deciding to set its own agenda and aggressively lobbying to forestall Congress from making any changes to the Fed’s mission or structure.
The Fed is a creature of Congress. If Congress wants to abolish it, it can. If Congress wants the Fed to double the money supply every six months, it can. If Fed officials don’t like what Congress is telling them to do, they can quit. When you sign up to work for the government, you are an employee and you do what your employer tells you to do.* In the case of the Fed, that employer is Congress.
Congress has established the dual (actually triple) mandate for the Fed, requiring the Fed to take into account the aims of maximum employment, stable prices, and moderate long-term interest rates when conducting monetary policy. Congress has never really gotten down into the weeds of how the Fed is to do that. But Congress is now taking a less hands-off approach and, through the FORM Act, is attempting to require the Fed to adhere to a “rules-based” monetary policy.
Is the Fed’s current conduct of monetary policy problematic? Yes. Is a rules-based monetary policy problematic? Yes. But Congress still has the power to dictate to the Fed how it is to do what it does.
Congress is supposed to be the most powerful branch of the government. It has the power of the purse for a reason. It funds government agencies and enacts laws to direct them how to use those monies. The Fed may not receive direct appropriations from Congress, but it is still indirectly funded by the federal government through the interest it earns on its holdings of Treasury securities. These are Treasury securities funded, remember, through the creation of money out of thin air. If you want the privilege of creating money for nothing and using that money to purchase assets on which you are paid interest, don’t be surprised when the entity (Congress) that gave you that privilege expects to be able to tell you what to do. That privilege comes with strings attached. But the Fed is trying to eat its cake and have it too.
The growth of the Executive Branch during the 20th century turned the relationship among the three branches of government on its head. It was not just Europe that was swept by a desire from strong executive leadership in the early 20th century, the United States followed that same model and has continued to do so since then. Presidents routinely thumb their noses at Congress, executive agencies ignore laws that they don’t want to enforce, and federal employees routinely complain that Congress is “getting in the way” of them doing their jobs. Sorry, but the job of a federal official is to do what Congress tells them to do. When Congress says jump, they’re supposed to ask how high.
Is the Federal Reserve still the servant of Congress or does it now see itself as the master?
Regardless of anyone’s position on the merits or drawbacks of the FORM Act’s proposals, the sight of a federal official publicly advocating against a change in her job description should be a wakeup call. And again, regardless of your views of the effectiveness or desirability of the particular proposals in the FORM Act, the fact that the Federal Reserve is agitating so militantly against any reform or accountability proposals should be reason number one to finally get serious about reform or repeal of an out of control Federal Reserve System.
*This is assuming of course that what Congress is demanding is constitutional. Especially over the past century, that cannot be assumed to be the case, which does cause complications in certain instances.
Do you believe it’s unethical for the Fed chair to lobby Congress? Let us know what you think!