Neither Intelligible, Nor a Principle

May 20, 2010

The Fed’s “dual mandate” to promote maximum employment and curb inflation is problematic. It’s sort of like telling someone to work as much as possible and sleep as much as possible. The two goals counteract one another, and there’s a whole lot of middle ground between them. Matt Yglesias dreams of a better way:

This is pie-in-the-sky, but I think that if Congress wants to get serious about supervising the Fed better what they ought to do is scrap the “dual mandate” in favor of something clearer. The nature of the dual mandate is that it’s impossible to say if the Fed is meeting its mandate, and thus impossible to hold anyone accountable. As an alternative, Congress could set a statutory nominal GDP trend target or a price level trend target and hold the leadership of the Fed accountable based on how good a job they do of hitting the target.

One thing the current system shows you is that it doesn’t take much for a statutory mandate to satisfy the Supreme Court’s “intelligible principle” standard (though I don’t believe the Supreme Court has specifically addressed the Fed’s mandate—no one has standing to challenge it). The Court has held that Congress may delegate power to an administrative agency—e.g., to conduct the nation’s monetary policy—only when Congress specifies an intelligible principle to guide the agency’s discretion in exercising the delegated power.

One perfectly intelligible principle for the Fed would be: Go forth and do open-market mumbo jumbo to achieve maximum employment. Another perfectly intelligible principle would be: Go forth and do open-market mumbo jumbo to stabilize prices. But to demand both at once is scarcely intelligible, and hardly a principle. Basically we’re leaving it to the Fed to decide how to balance inflation and unemployment. And I guess that’s what the Fed will always say it’s doing—no matter what policy direction it takes. 

Because of the Fed’s cherished “independence,” and because the Federal Open Market Committee (the Fed’s rate-setting arm) is stacked with regional Fed bankers, the Fed’s obscure, relativistic mandate is tantamount to untouchable regulatory capture. It’s not clear that auditing the Fed can change this underlying dynamic.

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