This Christmas, Congress has been handed a rare opportunity to reform the Federal Reserve System. This is thanks to a recently reported Freedom of Information Act request, which yielded a pre-pandemic version of the Fed’s so-called “Doomsday Book.”
This internal document is a quick-reference crisis guide on the Fed’s tools and sources of authority. What it reveals is the Fed’s institutional hubris and its creativity in stretching its legal authority.
“The powers of a Federal Reserve Bank are far greater than is commonly supposed,” the document proclaims. This arrogant declaration makes the nature of the problem clear. Congress should address this affront and reassert its Constitutional monetary responsibility with three important reforms.
Monetary policy is often shrouded in mystery. Investopedia calls it the central bank’s set of tools to control “money supply and promote economic growth.” But under the Constitution, Congress that is supposed to set monetary policy. The Coinage Act of 1792 is an early instance of Congress exercising that authority.
Historically, Congress has delegated monetary policy implementation to some combination of a national bank and the Treasury Department. But since the Progressive Era, Congress has essentially abdicated this responsibility entirely, treating it as the sacred responsibility of an unelected fourth branch of government.
To be sure, society is not well served by a fickle Congress (or administration) micro-managing monetary policy. Former Fed Chair Ben Bernanke noted that “Congress has the ultimate responsibility of assuring itself and the public that monetary policy is being conducted reasonably and in the national interest,” but that “Congress is not well-suited to make monetary policy decisions itself …”
Therefore, he recommends leaving monetary policy to central bankers, who “focus on the longer-term interests of the economy, free of short-term political considerations.” Yet central bankers are not wholly disinterested or immune to politics. Their policy choices may be good for the economy broadly, but they are not always balanced between Wall Street and Main Street.
Hence, many think the system is rigged in favor of banks and corporate giants, while small businesses barely survive and inflation steamrolls working families.
The “Doomsday Book” reveals the Fed’s need for clearer authority. Its release should provide Congress with new impetus for reforms that remove ambiguities, restore public confidence, and reassert Congressional authority.
These include the establishment of clear non-crisis policies and pre-approval of authority for crises that require after-action approval or disapproval if authority is exceeded.
Reform should involve both an affirmation of current non-controversial practices, and official policies like an inflation target. For example, the Fed’s 2 percent inflation target aims to provide relative stability while guarding against deflation, but even a 2 percent policy target affects Americans. This choice should be specified by Congress, not delegated to unelected, unaccountable bureaucrats.
Consider the September Bureau of Economic Analysis Comprehensive Update of Real GDP, which shows a $1.536 trillion real GDP shift in 2017 when the reference-year is changed from 2012 to 2017. The Fed roughly hit its 2-percent target over the period, but this 11.8 percent inflation means that a family earning $100,000 in 2012 had to earn $111,768 in 2017 in order to avoid a pay cut. Even if this is inevitable, an accountable, elected Congress should be responsible for setting such a standard, not the Fed.
When financial crises come, the Fed needs clarity on what it can do. For this reason, the vague justifications in the “Doomsday Book” should be replaced with clear authorities. For instance, the authority is asserted to use repurchase agreements, even though “the source of authority for a particular transaction is ambiguous.” Three sections of the Federal Reserve Act are referenced to justify this statement, but the document does “not see the point to deciding precisely which authority is being used.” Repurchase agreements (or “repos”) are normal tools, and if Congress concurs, they should be unambiguously authorized.
Further, when the Fed exceeds its authority, Congress should reserve the right to disapprove through an after-action process, not unlike what it can do to regulations under the Congressional Review Act. Congress could thus remedy the Fed’s excesses while providing clear guidance for the future.
Ideally — and this goes far beyond the “Doomsday Book” — Congress should explore a more ambitious solution. Fiat currency, where the Fed expands the money supply as needed, is bad for the economy and encourages Congress to overspend. Consider the parallel tracks between money supply growth during the pandemic and the post-pandemic inflation explosion.
Since 2017, Core CPI has grown by more than 24 percent. To keep pace, a family earning $100,000 in 2017 would need $124,667 in 2023 to maintain the same standard of living. Congress should link the dollar to a stable asset, such as the traditional favorite of gold or else a basket of commodities. This would impose needed fiscal discipline and protect the property and savings of hard-working Americans.
Monetary challenges have been with us since our nation’s founding. During the Revolutionary War, George Washington and Alexander Hamilton learned monetary policy as they struggled to pay soldiers with a devalued currency. The same economic factors are at work today as families struggle to keep pace with inflation.
Monetary policy always affects us all, even if we don’t fully understand it. This is why it is important for Congress to reclaim its Constitutional monetary authority, setting the policy and letting the Fed merely execute it. This is the way to generate growth while protecting the day-to-day income and savings of all Americans.
J. Douglas Branch II served as Deputy Staff Director of the Joint Economic Committee (JEC) and Deputy Chief of Staff to a Financial Services Subcommittee Chairman. He is the founder of Phronesis Insights.