Bill Proposes End to Fed's Stimulus Role, Return to Single Mandate

Two members of the Senate Banking Committee have introduced legislation which, if enacted, would severely restrict activities of the Federal Reserve Bank.  Bob Corker (R-TN) and David Vitter (R-LA) are sponsors of the Federal Reserve Single Mandate Act of 2013 which will reduce the Bank’s role to re-establishing price stability.

The bill would eliminate what Corker called “the broad, bipolar mandate” the Bank has today which, he said, blurs the line between fiscal and monetary policy and allows Congress to shirk its responsibility to enact sound budgets and policies that produce economic growth.”
Section 2A, (Monetary Policy Objectives) of the Federal Reserve Act currently reads:   

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

The Corker/Vitter bill simply amends this to read:

…to increase production, so as to promote effectively the goals of long-term price stability, a low rate of inflation, and moderate long-term interest rates. The Board shall establish an explicit numerical definition of the term ‘long-term price stability’ and shall maintain monetary policy that effectively promotes such long term price stability.

It appears that this would effectively prohibit the Fed from participating in any stimulative initiatives such as the several rounds of quantitative easing it has undertaken during the current financial crisis.  

 “I’ve long argued that the Fed should just focus on inflation. With endless stimulus-type initiatives coming out of the Fed and the money printing press never ending – all under the banner of helping boost employment – the Federal Reserve should get back to its original goal. This policy strives to do just that,” said Vitter.

“Providing the Fed with a clear and explicit focus on keeping inflation low will serve America better than the broad, bipolar mandate it has today,” Corker said. “The best way to achieve full employment in the long-run is to provide markets certainty that long-term price stability will be maintained.”rn

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