Congress should resist the temptation to use the Fed to advance social policy or fund its favorite programs off-budget. In turn, the Fed should halt its mission creep into fiscal policy and stay out of unrelated partisan congressional debate.
During the 2008 financial crisis the Fed, using its so-called 13(3) exigent-circumstances powers, propped up a single sector of the economy—the housing market—not to mention nondepository financial institutions like investment bank Bear Stearns. In 2010 Congress broke precedent and used the Fed’s balance sheet to fund in perpetuity the newly created and unrelated Consumer Financial Protection Bureau. In 2015 it used the Fed’s capital surplus account to help fund a highway bill.
Since the advent of Covid, the Fed has become thoroughly ensconced in fiscal policy, specifically credit policy, by backstopping practically every credit market in the U.S. Extraordinary times require extraordinary actions. The nation should be grateful for many emergency measures the Fed took during two historic crises. But these steps went way beyond the Fed’s monetary-policy remit. Continuing them in ordinary times is fraught with peril. To use a dramatic parallel, Abraham Lincoln suspended the writ of habeas corpus during the Civil War. Few thought that was wise or constitutional after Appomattox.
Some members of Congress have called for the Fed to use its balance sheet—now more than 10 times as large as before the 2008 financial crisis—to fund government programs as diverse as public transit and the arts. Depending on the outcome of future elections, other lawmakers could seek to use the Fed’s balance sheet to fund border security, for example. Legislators may now begin wondering why they should go through the messy and difficult process of winning an annual congressional appropriations vote when they can simply have the Fed fund their favorite programs off-budget.
Another threat to the Fed’s monetary-policy independence comes from a bill pending in Congress that would force the central bank “to address the ongoing crisis of racial inequality and disparities in economic outcomes.” The Fed is no more equipped to deal with these issues than the Pentagon is equipped to police securities markets. If the bill becomes law, the Fed may be saddled with a laundry list of policy mandates—from social justice to free speech. There are many noble causes and many partisan political issues. They don’t belong at the Fed.
The Fed itself hasn’t been blameless. At his recent second-term confirmation hearing, Mr. Powell endorsed the idea of “climate stress tests” for banks. The Fed has promoted research papers on everything from paid sick leave to higher-education reform. These are important issues. But all are subject to partisan debate and far afield from monetary policy.
Some at the Fed have expressed concerns over the loss of monetary-policy independence. Randal Quarles, the Fed’s departing vice chairman for supervision, warned in December that normalizing fiscal measures at the central bank could lead to “dangerous fiscal irresponsibility, and the attendant pressures would turn [the Fed] from a technocratic, non-political institution . . . into the most politically entangled organization in the country.”
It is time to depoliticize monetary policy. First, instead of making the Fed’s mandate broader, Congress should consider narrowing it to one of price stability. The Fed’s contribution to achieving full employment should be through focusing on long-term price stability. Next, as we learn to live with Covid and as the economy continues to recover, the Fed must go beyond merely tapering its bond purchases. It must set out a credible process and timetable to unwind its balance sheet.
Should the Fed be called on again to exercise emergency powers, Congress must ensure those powers are of limited duration and that any credit facilities created are quickly transferred to the Treasury Department. Finally, the more improvisational and discretionary the Fed’s conduct of monetary policy, the more difficult it is to withstand political pressures. The Fed should move to a monetary-policy framework that is more systematic, predictable and transparent.
If politicized monetary policy doesn’t prove transitory, it is doubtful the Fed will be able to deliver either stable prices or maximum employment.
Mr. Hensarling served as a U.S. representative from Texas (2003-19) and chairman of the House Financial Services Committee (2013-19).
Appeared in the January 18, 2022, print edition.