Why Doesn't the Fed Know What Its Job Is?

According to the Federal Reserve Board's self-published guide to the Federal Reserve, the first duty of the central bank is "conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates." This morning, I was watching a panel at the America's Fiscal Choices conference that included economists Paul Krugman and Martin Feldstein. Krugman proposed some kind of new Fed action to bolster the job market, and Feldstein replied that the idea would never fly, explaining that "within the Fed, they'd say that 'we don't do unemployment, we do price stability.'"

It's not that Feldstein is wrong in assessing the response of Fed officials to demands for a more aggressive monetary policy -- that's the answer we've been hearing from the Fed for the past six months. The problem is that right now prominent economists and the Federal Reserve board blithely recognize that a rather substantial chunk of the central bank's congressionally assigned mission is simply ignored. It seems to me that part of the political independence the government has granted the Fed is contingent on it completing all parts of its mission. If it fails to do so, maybe Congress should take that assignment -- and the power that goes with it -- and give it to someone more responsible.

-- Tim Fernholz

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