Over at WaPo. In preparing for something, I was reading the text of the Choice Act–that’s the financial deregulation bill the House recently passed (there’s a link in the piece). I knew the Act included some pretty invasive Fed oversight but when I actually read the legislation (Title X), the old jaw dropped. It writes down the ’93 version of the “Taylor rule” (read the piece for details), and makes the Fed have to jump through hoops if they use any discretion in its application.
My piece focuses on why such rigid rules-based policy making is a terrible idea, as it would undermine both the Fed’s analytic flexibility and their political independence. The latter is particularly toxic given the relative functionality of the Fed versus the Congress.
But there was one point I left out of the WaPo piece, which was already way too long.
What are House conservatives really up to here? Surely, they’ve not thought through the implications of insisting on the use of 0.5 as the coefficient on the slack variable in the rule. Much as you can interpret any hard-right legislation as motivated by shrinking gov’t to provide tax cuts for rich people, so can you interpret anything in the regulatory space as allowing firms to do whatever they want to maximize profits without concerns for negative externalities, like blowing up the economy.
That dynamic is clearly represented in the Choice Act in general, which is mostly about unwinding Dodd-Frank (as I note, it requires 60 votes in the Senate, so it may well be blocked, but the financial lobby is aggressive and deep-pocketed).
But the target of this Fed mishegas may be a bit more nuanced than that: conservatives have long been gunning to reduce the Fed’s dual mandate–full employment at stable prices–to a sole mandate of stable prices. After all, full employment gives workers more bargaining power, and higher inflation can erodes asset values. Note that the “reference rule” in Title X (see my piece) returns an Fed funds rate of over 3% right now, versus the 1% to which the Fed just raised.
Congressional conservatives want more Fed oversight so they can fight against “easy money,” any inflation at all, and the haunting specter of full employment.