By Howard Schneider
WASHINGTON (Reuters) -The head of a new congressional panel gearing up to strengthen Capitol Hill’s oversight of the Federal Reserve plans a broad review of how the U.S. central bank makes its interest rate decisions, including whether controlling inflation should be prioritized over safeguarding employment.
“A substantial number of my Financial Services Committee colleagues and the chairman want to discuss that issue,” Representative Frank Lucas, an Oklahoma Republican, told Reuters in an interview on Monday ahead of next week’s first hearing of the Monetary Policy, Treasury Market Resilience, and Economic Prosperity Task Force. “Is there really a dual mandate? And how does that affect the primary mandate of price stability?”
The Fed’s dual mandate – to foster price stability and maximum employment – was imposed by Congress in 1978, and right now it is close to both goals: The unemployment rate is 4% and inflation has eased to 2.6% relative to a 2% target, a far better outcome than many feared.
But the experience following the COVID-19 pandemic, with inflation surging to 40-year highs and the Fed scrambling to beat it with rapid rate hikes, has left scars.
Lucas, a three-decade congressional veteran, is keen to explore whether the Fed’s approach was flawed. Across a series of hearings in coming months, he will also look at longstanding issues like whether the Fed should make more use of monetary policy rules in its decisions, perhaps not to the full exclusion of its own discretion but as a way to give the public more certainty about the direction of policy.
“If your primary focus is price stability, and if you want the forces of the economy to be able to make decisions, then a more rules-focused process provides certainty to that,” Lucas said.
Lucas acknowledged the difficulty of amending the Federal Reserve Act given narrow Republican majorities in the House and Senate, and the nearly 50-year legacy of the dual mandate, but he expects his process potentially to lead to recommended legislation, a series of reports, or recommendations to the Fed.
That is timely, he said, given the Fed is currently conducting its own review of an operating framework that in 2020 intensified its focus on joblessness – and which some argue slowed its response to price pressures that began building in 2021.
“These issues are relevant right now,” he said. Along with monetary policy, the panel – composed of eight Republicans and six Democrats – will look at issues around the functioning of the U.S. Treasury market.
“TOO MANY DISTRACTING ‘MANDATES'”
The Lucas task force adds a new layer of oversight to what may already be a sensitive Fed discussion about whether to keep changes made in 2020 to its monetary policy framework.
Adopted amid the high unemployment and stress of the early pandemic and following years of chronically low inflation, the changes tilted the Fed’s focus towards jobs, declared maximum employment a “broad-based and inclusive goal,” and made other changes cheered at the time by labor advocates.
But it also led to a strict set of tests for raising rates, which the Fed did not do until March 2022 after months of dismissing rising prices as “transitory” and calling the jobs recovery incomplete.
While it’s not clear how much difference an earlier Fed response would have made, the language in the new framework – promising to use periods of high inflation to balance low ones, for example – remains a focus of critics who say the Fed’s priorities have drifted.
“For far too long, we have witnessed too many distracting ‘mandates’ diluting the Federal Reserve’s core mission of price stability,” Financial Services Committee Chair and Arkansas Republican French Hill said last month in launching the task force.
Concern over Fed “mandate creep” has been intense among congressional Republicans who view its research and discussion around issues like climate change and economic inequality as an inappropriate distraction in setting monetary policy.
Fed officials contend they need to understand broad sets of issues in order to make effective decisions, while Chair Jerome Powell has tried to square the circle by arguing that controlling inflation is perhaps more important for poorer families than it is for wealthier ones.
Still, the criticism has resonated at the Fed, with the framework review occurring in the midst not just of the new task force’s work, but also in the context of a broader backlash from President Donald Trump’s administration to what he refers to as “woke” policies.
The 2020 changes were seen then as a rational move given the importance of offsetting pandemic job losses.
The prior decade’s experience had convinced policymakers that the labor market could be tighter, with lower unemployment, than previously believed without stoking inflation.
The extended run of near-zero interest rates and tepid inflation led officials to conclude more was needed to ensure inflation and public inflation expectations centered on the Fed’s target over time.
The approach, dubbed Flexible Average Inflation Targeting, promised higher inflation episodes to offset periods of weakness as a way to keep interest rates away from zero and avoid the risk of outright deflation.
But Hill opened a recent hearing chiding Powell that the strategy “in hindsight…appears ill-timed and ill-fitted for a post-pandemic world.”
Echoing Hill’s comment, Fed officials themselves have “noted…that the current economic environment differed greatly” from the “low inflation and interest rates” that drove the 2020 revisions, according to minutes of last month’s meeting. “In light of the experience of the past five years, participants assessed that it was important to consider potential revisions.”
(Reporting by Howard Schneider; Editing by Dan Burns and Andrea Ricci)
