[Senate Hearing 112-418]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-418
 
  MONETARY POLICY GOING FORWARD: WHY A SOUND DOLLAR BOOSTS GROWTH AND 
                               EMPLOYMENT

=======================================================================

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 27, 2012

                               __________

          Printed for the use of the Joint Economic Committee



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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE                               HOUSE OF REPRESENTATIVES
Robert P. Casey, Jr., Pennsylvania,  Kevin Brady, Texas, Vice Chairman
    Chairman                         Michael C. Burgess, M.D., Texas
Jeff Bingaman, New Mexico            John Campbell, California
Amy Klobuchar, Minnesota             Sean P. Duffy, Wisconsin
Jim Webb, Virginia                   Justin Amash, Michigan
Mark R. Warner, Virginia             Mick Mulvaney, South Carolina
Bernard Sanders, Vermont             Maurice D. Hinchey, New York
Jim DeMint, South Carolina           Carolyn B. Maloney, New York
Daniel Coats, Indiana                Loretta Sanchez, California
Mike Lee, Utah                       Elijah E. Cummings, Maryland
Pat Toomey, Pennsylvania

                 William E. Hansen, Executive Director
              Robert P. O'Quinn, Republican Staff Director


                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Kevin Brady, Vice Chairman, a U.S. Representative from Texas     1
Hon. Elijah E. Cummings, a U.S. Representative from Maryland.....     9
Hon. Jim DeMint, a U.S. Senator from South Carolina..............    12
Hon. Mike Lee, a U.S. Senator from Utah..........................    15

                               Witnesses

Hon. John B. Taylor, Ph.D., Mary and Robert Raymond Professor of 
  Economics, Stanford University, Stanford, CA...................     4
Hon. Laurence Meyer, Senior Managing Director and Co-Founder, 
  Macroeconomic Advisers, Washington, DC.........................     6
Hon. William Poole, Ph.D., Senior Fellow, Cato Institute, Former 
  President and Chief Executive Officer of the Federal Reserve 
  Bank of St. Louis, Washington, DC..............................     7

                       Submissions for the Record

Prepared statement of Vice Chairman Kevin Brady..................    26
Prepared statement of Hon. John B. Taylor, Ph.D..................    27
Prepared statement of Hon. Laurence Meyer........................    31
    Supplementary Materials......................................    33
Prepared statement of Hon. William Poole.........................    39
Prepared statement of Representative Elijah E. Cummings..........    45


  MONETARY POLICY GOING FORWARD: WHY A SOUND DOLLAR BOOSTS GROWTH AND 
                               EMPLOYMENT

                              ----------                              


                        TUESDAY, MARCH 27, 2012

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 2:28 p.m. in Room 
216 of the Hart Senate Office Building, the Honorable Kevin 
Brady, Vice Chairman, presiding.
    Senators present: DeMint and Lee.
    Representatives present: Brady (presiding) and Cummings.
    Staff present: Conor Carroll, Gail Cohen, Colleen Healy, 
Patrick Miller, Matt Salomon, Michael Connolly, Emily Jaroma, 
Doug Branch, and Robert O'Quinn.

 OPENING STATEMENT OF HON. KEVIN BRADY, VICE CHAIRMAN, A U.S. 
                   REPRESENTATIVE FROM TEXAS

    Vice Chairman Brady. Good afternoon, everyone. Thank you 
for understanding the change in schedule due to House votes, 
and I am pleased to call this Joint Economic Committee hearing 
to order. I appreciate so much the presence of our 
distinguished witnesses today.
    Today's hearing seeks to determine what role the Federal 
Reserve should play going forward to ensure that the United 
States has the world's strongest economy in the 21st century. A 
sound dollar, in my view, is a necessary prerequisite for 
maximizing economic growth and job opportunities for hard-
working American taxpayers.
    This proposition is both simple and profound. The sound 
dollar requires the Federal Reserve preserve the purchasing 
power of the dollar over time. Price stability reduces 
uncertainty and encourages entrepreneurs to make investments in 
new buildings, equipment and software and hire more workers, 
and price stability is especially important for struggling 
families, each time they buy groceries or fill their tanks with 
gasoline.
    Both inflation and deflation slow growth and destroy jobs. 
For hard-working taxpayers, the decline in the dollar's 
purchasing power is the same as a cut in pay. Today's hearing 
will explore how the Federal Reserve should achieve a sound 
dollar. In 1977, Congress gave the Fed a dual mandate for 
maintaining price stability and maximizing output and 
employment. Nobel Laureate economist Robert Mundell observed 
``To achieve a policy outcome, you have to use the right policy 
lever.'' In January, the Fed recognized that monetary policy is 
the right lever to maintain the purchasing power of the dollar 
by declaring ``the inflation rate over the longer run is 
primarily determined by monetary policy.''
    In contrast, the Fed acknowledged that monetary policy is 
the wrong lever to promote job creation, by declaring ``the 
maximum level of employment is largely determined by non-
monetary factors.'' During the 1970's, the Fed tried to use 
monetary policy to stimulate job creation, and the United 
States ended up with both higher inflation and higher 
unemployment.
    Critics charge that eliminating the dual mandate means we 
don't care about jobs. They are wrong. The opposite is true. 
It's precisely because we care about jobs and growth that 
Congress should direct the Fed to preserve the purchasing power 
of the dollar. Monetary policy cannot stimulate employment, 
except for short, temporary bursts. However, monetary policy 
can achieve price stability, which is the foundation for 
creating the greatest number of jobs that last.
    During the 1980's and 1990's, the Fed moved toward a rules-
based policy, by ignoring the employment half of its mandate to 
pursue price stability. Two long booms resulted, with very low 
inflation, and strong job creation and rising real incomes. 
Then, between 2000 and 2005, the Fed deviated from the 
successful rules-based regime by keeping interest rates too low 
for too long. This contributed to the inflation of an 
unsustainable housing bubble, that eventually triggered a 
global financial crisis.
    Since the height of the financial crisis, during the fall 
of 2008, Washington has increasingly relied on the Fed to take 
unusual interventionist actions, such as tripling the size of 
its balance sheet under QE1 and QE2. Indeed, the Fed justified 
these extraordinary actions by invoking, for the first time 
ever in late 2008, the employment half of the Federal Reserve's 
dual mandate.
    It appears the Fed took these actions to compensate for the 
President's failure to pursue pro-growth budget, tax and 
regulatory policies. And just low borrowing costs are masking 
the pain of historically high federal budget deficits, the 
Fed's monetary experimentation allows the White House and 
Congress to shirk their responsibility for creating a 
competitive business climate.
    It is time to reform the Federal Reserve for the 21st 
Century, with a single mandate for price stability, achieved 
through inflation targeting. In January, the Fed announced an 
inflation target of two percent, defined in terms of the price 
index for personal consumption expenditures. I applaud this 
step toward a rules-based inflation targeting regime, but I 
hope two percent is the upper limit of the range.
    As many of us know, accurately measuring inflation isn't 
easy. In the last decade, we clearly saw that price indices of 
goods and services do not always record all of the price 
movements in our economy, allowing asset bubbles to inflate 
undetected.
    To identify incipient asset bubbles before they inflate to 
dangerous levels, the Fed should also monitor (1), the prices 
of and returns on broad classes of assets including equities, 
corporate bonds, state and local government bonds, agricultural 
real estate, commercial and industrial real estate, and 
residential real estate; (2), the price of gold; and (3) the 
foreign exchange value of the U.S. dollar.
    On March 8th, I introduced the Sound Dollar Act in the 
House. The Sound Dollar Act reforms the Fed in several 
important ways. It replaces the dual mandate with a single 
mandate for long-term price stability; it increases the Fed's 
accountability and openness; it expands and diversifies the 
voting membership of the Federal Open Market Committee; ensures 
credit neutrality for future Fed purchases; and institutes 
necessary Congressional oversight of the Consumer Financial 
Protection Bureau.
    These reforms, I believe, are critical to ensuring America 
has the world's strongest economy in the 21st century. Moving 
to a single mandate for price stability will help to spur 
investment and create millions of new jobs on Main Streets 
across America. I look forward to the testimony of our 
distinguished witnesses.
    Now we do have, because of votes, several members will be 
coming in late, and when our minority members arrive, we'll 
make sure they are recognized for an opening statement. At this 
time, I'd like to introduce our panel, starting with John B. 
Taylor. John Taylor is the Mary and Robert Raymond Professor of 
Economics at Stanford University, and the George P. Schultz 
Senior Fellow in Economics at the Hoover Institution.
    From 2001 to 2005, Dr. Taylor served as Under Secretary of 
Treasury for International Affairs. Prior to that, the served 
as a member of the President's Council of Economic Advisers 
from 1989 to 1991, and as a member of the Congressional Budget 
Office's Panel of Economic Advisors from 1995 to 2010. His 
academic fields of expertise are macroeconomics, monetary 
economics and international economics.
    Dr. Taylor is best-known for his Taylor Rule, a policy tool 
that prescribes the appropriate level for the target federal 
funds rate, based upon measures of actual inflation and output 
relative to potential inflation and output.
    Dr. Taylor has written and contributed to numerous academic 
journal articles, economic textbooks, new commentaries and 
books, including Getting Off Track: How Government Actions and 
Interventions Caused, Prolonged and Worsened the Financial 
Crisis, as well as First Principles: Five Keys to Restoring 
America's Prosperity. He received a BA in Economics summa cum 
laude from Princeton University in 1968, and a doctorate in 
Economics from Stanford in 1973. Dr. Taylor, welcome.
    Dr. Laurence Meyer is a Senior Managing Director at 
Macroeconomic Advisers, LLC. From 1996 to 2002, Dr. Meyer 
served as a member of the Board of Governors of the Federal 
Reserve System.
    Before becoming a member of the Board, he was president of 
Laurence H. Meyer and Associates, the St. Louis-based economic 
consulting firm specializing in macroeconomic forecasting and 
policy analysis. Dr. Meyer has had numerous articles published 
in professional journals, has authored a textbook on 
macroeconomic modeling, and has testified before Congress on 
macroeconomic policy issues.
    He received a BA magna cum laude from Yale University in 
1965, a doctorate in Economics from the Massachusetts Institute 
of Technology in 1970. Welcome, Dr. Meyer.
    Dr. William Poole is a distinguished scholar in residence 
at the University of Delaware and a senior fellow at the Cato 
Institute. Previously, Dr. Poole was the president and chief 
executive officer of the Federal Reserve Bank of St. Louis from 
1998 to 2008. Dr. Poole was also a member of the Council of 
Economic Advisers in the first Reagan Administration from 1982 
to 1985.
    Dr. Poole has published numerous papers in professional 
journals, and published two books, Money and the Economy: A 
Monetarist's View in 1978, and Principles of Economics in 1991. 
He attended Swarthmore College, received an AB degree in 1959, 
and received MBA and doctorate degrees from the University of 
Chicago in 1968 and 1966, respectively. Again Dr. Poole, thank 
you for joining this distinguished panel.
    I appreciate my counterpart on the Joint Economic Committee 
from the Senate, Senator DeMint, being with us today as well. 
Thank you. Dr. Taylor, we've reserved five minutes for opening 
remarks and questioning from the panel afterwards. You're 
recognized. Can we make sure that microphone is transmitting?
    [The prepared statement of Representative Brady appears in 
the Submissions for the Record on page 26.]

   STATEMENT OF HON. JOHN B. TAYLOR, PH.D., MARY AND ROBERT 
RAYMOND PROFESSOR OF ECONOMICS, STANFORD UNIVERSITY, STANFORD, 
                               CA

    Dr. Taylor. Thank you very much, and thanks for inviting me 
to testify on this important topic. We've now had almost 100 
years of experience with the Federal Reserve Act and decision-
making under the Federal Reserve. We've also had careful, 
documented, empirical studies of what happened during this 
period by people like Milton Friedman, Anna Schwartz and Allan 
Meltzer.
    I think there's plenty of evidence that the kind of policy 
that works well is a rules-based, predictable, systematic 
policy, and the kind of policies that don't work well are the 
more unpredictable discretionary policies. The actions of the 
Federal Reserve in the Great Depression, where money growth was 
cut, are just one example now of many.
    From the mid-60's into the 70's, we had a similar period of 
go-stop discretionary monetary policy. Our money growth was 
increased and then decreased, leading ultimately to very high 
unemployment, very high inflation, very high interest rates and 
low economic growth.
    Then we had a period in the 80's and 90's, which was more 
rules-based, more predictable. The result was declining 
unemployment, lower inflation, ultimately higher economic 
growth and far fewer recessions. Unfortunately recently, we've 
moved back to these more discretionary kinds of policies. 
Beginning in 2003, 2004 and 2005, the Federal Reserve held 
interest rates too low for too long, compared to the kind of 
policy it would have followed in the 80's and 90's.
    This discretionary policy has continued. In fact, it's hard 
to overstate how discretionary policy has been. As the economy 
begins to improve, inflation begins to pick up, and indicators 
are suggesting that interest rates should be on the rise, we 
have strong signals from the Federal Reserve that interest 
rates going to be near zero through 2014.
    All the Fed has to do to buy trillions of dollars, billions 
of dollars of mortgage-backed securities or mortgages or 
securities backed by other items, is credit banks with 
deposits, electronic deposits, bank money so-called, or reserve 
balances so-called, and they have unlimited ability to purchase 
as many of these items that they want.
    As a result of this, the Central Bank's balance sheet, the 
Central Bank's amount of reserve balance has increased from 
about $10 billion before the crisis, to $1,600 billion at the 
end of 2011. Even if one abstracts from the extraordinary 
interventions taken during the panic, the interventions that 
we're seeing now with the quantitative easings and this 
extensive use of the Fed's additional tool of monetary policy, 
are unprecedented.
    I believe this causes uncertainty, helps slow the economy 
down. It leads to speculation of what the Fed will do next. 
Will there be a quantitative easing; will there not be; what 
will be the circumstances under which that occurs? So to me, 
the lesson of the history throughout this whole 100 year period 
is that the Federal Reserve ought to get back to more rules-
based predictable policy, less interventionist policy as soon 
as it can.
    I believe the legislation in the Sound Dollar Act, many of 
the provisions, will help the Fed move in this direction. I 
believe the idea of replacing the confusing dual mandate, first 
introduced during a highly interventionist period in the 70's, 
will improve decision-making by the Fed. It will not increase 
unemployment, as some worry. Indeed, I think it will reduce 
unemployment.
    For example, if the Fed had not taken the actions in 2003, 
2004 and 2005 to lower interest rates so much, which were 
indeed motivated to some extent by the dual mandate, I believe 
we would have had a good chance of avoiding the depth of this 
Great Recession, avoiding the higher unemployment, and 
ultimately would have had lower unemployment as a result.
    I also think the provisions in the Sound Dollar Act to 
restrict the kinds of assets the Fed purchases are warranted. 
To the extent that the Fed buys assets backed by mortgages or 
potentially assets backed by automobile loans or even student 
loans, brings the Federal Reserve into areas of responsibility 
which are not in the spirit of the Constitution, and raises 
questions about the Fed's independence itself. I think those 
restrictions are important.
    And finally to conclude, I believe the idea of broadening 
the voting responsibility to all the District bank presidents 
is warranted. It will enable them all to participate in the 
important act of designing a rules-based strategy, and it will 
remove any semblance that there may be favoritism because of 
some presidents voting more frequently than others. Thank you, 
Mr. Chairman.
    [The prepared statement of Hon. John B. Taylor, Ph.D., 
appears in the Submissions for the Record on page 27.]
    Vice Chairman Brady. Thank you, Dr. Taylor. Let me note 
that was five minutes on the button. That rarely happens. Thank 
you very much. Dr. Meyer.

STATEMENT OF HON. LAURENCE MEYER, SENIOR MANAGING DIRECTOR AND 
       CO-FOUNDER, MACROECONOMIC ADVISERS, WASHINGTON, DC

    Dr. Meyer. Thank you for inviting me to testify on this 
proposed legislation. It seems to me that one of the keys here 
is that several provisions are attempts to prevent the FOMC 
from responding to divergences from full employment, even for 
example, in the Great Recession, and to restrict the FOMC from 
carrying out stimulative policies once they've reached the 
near-zero funds rate, as is the case today.
    But let me start with preliminaries. Can the Fed 
effectively carry out stabilization policy? Are estimates of 
the minimum sustainable unemployment rate so uncertain that 
policy aimed at promoting full employment might do more damage 
than good? Does a dual mandate undermine the ability of the 
Central Bank to meet its price stability mandate?
    Let me answer those questions. The CBO, the IMF, the Board 
staff, most FOMC members, generations of CEAs and Macroeconomic 
Advisers all believe the FOMC can effectively promote full 
employment in the short run, while achieving inflation price 
stability in the medium or longer-term. While there is some 
evidence that Central Banks that have explicit inflation 
targets anchor long-term inflation expectations better, the 
difference, relative to the U.S., is very slight, the evidence 
is mixed, and the Fed now has an explicit price stability 
objective.
    But the proof is in the pudding. Under Chairmen Volcker, 
Greenspan and Bernanke, the Fed has been successful in pushing 
longer inflation expectations down from an unacceptable level 
in the 1970's and early 1980's, right to a level consistent 
under their mandate, two percent. And there's been no 
backtracking.
    The case for keeping the funds rate near zero for an 
extended period, and the dramatic expansion of the Fed's 
portfolio, do not risk soaring inflation, as long, of course, 
as the FOMC exits in time. The Fed has all the tools it needs 
to drain reserves and shrink the portfolio when appropriate. In 
any case, as long as it controls interest rates, it can control 
inflation.
    This conclusion is consistent with the inflation 
projections of the CBO, the OMB, the IMF, FOMC participants, 
the Survey of Professional Forecasters and Macroeconomic 
Advisers. None projects inflation above two percent over the 
next several years, and some for a very long time.
    Now let's turn to specific provisions. First, should the 
Congress change the FOMC's mandate from a dual to a single 
mandate? The answer is, it depends. If the bill is intended to 
move the Fed to a flexible inflation targeting regime, one 
practiced by virtually every other central bank around the 
world, this is a discussion worth having, though I still prefer 
the dual mandate.
    Under the dual mandate, the two mandates are conceptually 
on an equal footing. With flexible inflation targeting, central 
banks also seek to achieve full employment and price stability, 
but in my view operate as if they have a hierarchical ordering 
of the two objectives, with price stability being the principle 
one and full employment secondary. However, the empirical 
evidence is very clear. The dual mandate and flexible inflation 
targeting of central banks operate in essentially the same way.
    But the provisions of this proposed legislation read 
clearly to move the FOMC to a hard inflation targeting regime, 
one that's practiced by no central bank around the world today. 
I strongly oppose this.
    Under such a regime, the Central Bank may only pursue price 
stability, and therefore must pay no attention to divergences 
from full employment, even in the case like the Great 
Recession. Perhaps Mervyn King summed it up best when he called 
supporters of such a framework ``inflation nutters.'' Should 
all presidents of Reserve Banks be voting members of the FOMC?
    The motivation of supporters, I expect, is that currently, 
there are more hawks among the presidents than among the Board 
members. So giving votes to all the presidents would perhaps 
prevent further quantitative easing.
    I find it very surprising that some Members of Congress, as 
a general principle, would want to decrease the power of Board 
members, who have been nominated by a democratically elected 
president, confirmed by a democratically elected members of the 
Senate, and make Reserve Bank presidents, appointed by 
unelected and unrepresentative boards, a majority on the FOMC. 
Supporters apparently believe that there's not enough regional 
influence on FOMC's national policy decisions, and that bankers 
do not have enough influence on monetary policy.
    Lastly, let me talk about the proposal, as I read it, 
restricting the Fed to holding only short-term government 
securities in its portfolio. The intention clearly is to remove 
the FOMC's ability to pursue quantitative easing. Now for an 
editorial. I regret the Fed has become so politicized. Some 
provisions of this bill appear to me clearly partisan. Congress 
should respect the following admonition: Changes in the Federal 
Reserve Act should only be seriously considered if there is 
wide bipartisan support. Thank you.
    [The prepared statement of Hon. Laurence Meyer appears in 
the Submissions for the Record on page 31.]
    Vice Chairman Brady. Thank you, Dr. Meyer. Dr. Poole.

  STATEMENT OF HON. WILLIAM POOLE, PH.D., SENIOR FELLOW, CATO 
INSTITUTE, FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE 
       FEDERAL RESERVE BANK OF ST. LOUIS, WASHINGTON, DC

    Dr. Poole. Vice Chairman Brady, members of the Committee, 
I'm pleased to be here--I almost said ``this morning'', but 
this afternoon--to comment on a number of interesting and 
important monetary policy issues.
    First, I want to applaud Congressional support for a clear 
assignment of responsibility to the Federal Reserve to achieve 
price stability, defined as a low and stable rate of inflation, 
and I encourage Congress to make the mandate explicit by 
incorporating in law the decision of the Federal Open Markets 
Committee to define the goal as two percent inflation.
    Now, unfortunately, the clarity of the goal of price 
stability in the Sound Dollar Act is somewhat muddied by 
reference to Fed monitoring asset prices. In pursuit of the 
goal of price stability, the Fed monitors many different 
measures of economic performance, including asset prices, and 
it would be unfortunate if mention of asset prices in the law 
created undue pressure on the Fed to act in some way or another 
as asset prices change.
    Obviously, asset price bubbles can be a serious problem. 
However, there is no settled understanding of how the Central 
Bank or anyone else can reliably identify an asset price bubble 
as it is occurring. I strongly support restriction of assets in 
the System Open Market Account to direct obligations of the 
United States Treasury.
    Without getting into an analysis of all the non-Treasury 
assets the Fed has purchased, consider the mortgage-backed 
securities portfolio. Since World War II, the U.S. government 
has engaged in a variety of credit programs, for better or for 
worse, I might add. These include farm credits, student loans, 
Export-Import Bank loans, Small Business Administration loans 
and so forth.
    Congress makes judgments about the amount of such credit to 
be offered, program objectives, eligibility, interest rate and 
other loan terms. These judgments belong with Congress and not 
with the Federal Reserve, because the judgments inherently have 
a political component to them. Understand when I say 
``political component'' it doesn't necessarily mean a partisan 
component.
    Now, the Federal Reserve has set its own rules for buying 
mortgage-backed securities, and other aspects of federal aid to 
the hard-hit housing sector have been matters for Congress and 
the President, but not the Fed's purchases of MBSs. Suppose the 
Fed's initial decision to purchase one and a quarter trillion 
of MBSs had instead been a recommendation to Congress for 
legislation to do the same thing, except that the Treasury 
would administer the program and hold the portfolio.
    What would some of the questions have been as Congress 
debated the proposal? Well, given the federal budget situation, 
would it have been wise to issue one and a quarter trillion of 
government bonds to provide the resources to purchase a 
portfolio of MBSs of like size? Should the entire one and a 
quarter trillion have been used for MBSs, or should some have 
been used to expand SBA, Small Business Administration loans, 
for example, or help students with struggling student loans? 
There are many other possible ways that Congress might have 
preferred to use one and a quarter trillion of new federal 
credit, than devoting it entirely to MBSs. These issues should 
have been debated and decided by Congress.
    Now, let me also emphasize this question. Who benefited 
from the Federal Reserve's program to accumulate and maintain a 
large portfolio of MBSs? A significant fraction of mortgages 
issued in recent years have been refinancing. Who can 
refinance? Only those with substantial equity in their 
properties, despite the decline in house prices and those with 
good credit ratings. I qualify on both counts.
    But why should the Fed be helping me and others in 
fortunate circumstances such as I enjoy? So I suggest that the 
JEC request a study from the Federal Reserve, to report on the 
characteristics of the mortgages in the MBSs in SOMA, and 
understand that the required data are readily available through 
CoreLogic.
    I believe that the benefits of Fed purchases of MBSs have 
gone primarily to homeowners in comfortable circumstances, and 
to banks and title companies that collect fees from mortgage 
financing. The program has done little to spur homebuilding. 
The monetary effects of expanding the SOMA would have occurred 
in equal measure if the Fed had purchased Treasury securities 
instead of MBSs.
    I have in my statement a fairly extensive discussion of 
Federal Reserve emergency powers under Section 13(3) of the 
Federal Reserve Act, but I see that I've exhausted my time, and 
we can come back to that topic, if the Committee wants to talk 
with me about it. Thank you.
    [The prepared statement of Hon. William Poole, Ph.D. 
appears in the Submissions for the Record on page 39.]
    Vice Chairman Brady. Thank you, Dr. Poole. Thank you for 
the testimony today. Before we begin questioning, I'd like to 
turn to Mr. Cummings for the opening statement from our 
minority members.

     OPENING STATEMENT OF HON. ELIJAH E. CUMMINGS, A U.S. 
                  REPRESENTATIVE FROM MARYLAND

    Representative Cummings. Thank you very much, Mr. Chairman. 
I'm sorry to be late. I had a matter on the floor of the House. 
Chairman Casey could not be here today, and I am pleased to 
stand in for him this afternoon. I want to thank Vice Chairman 
Brady for calling this hearing, to examine our nation's 
monetary policy and its effect on our economy.
    I also thank our esteemed witnesses for appearing before us 
today, and lending their expertise to this very important 
matter. The Federal Reserve System was created in 1913 to 
provide the nation with a safer, more flexible and more stable 
monetary and financial system. In 1977, Congress enacted 
legislation that spelled out in greater detail the Fed's 
monetary policy objectives, collectively known as the Fed's 
dual mandate.
    These objectives are to promote effectively the goals of 
maximum employment, stable prices and moderate long-term 
interest rates. I understand that today's hearing is being 
called to examine legislation proposed by the Vice Chairman, 
that would limit the Fed's mandate to the single objective of 
ensuring price stability, and that would make other changes to 
the Central Bank's decision-making authority and structure.
    While I certainly share the Vice Chairman's goal of 
ensuring price stability and preventing inflation, I believe 
that the current system is working effectively, and is also 
essential to enabling the Fed to adjust monetary policy quickly 
in times of crisis.
    While it is true that in the past few years, the Fed has 
implemented some extraordinary monetary policies, these actions 
were necessitated by extraordinary circumstances, and by most 
measures have helped stabilize our economy and prevent a 
complete collapse.
    Certainly, our recovery from the 2008 financial collapse 
has been long and painful, and at times filled with false 
promise. For example, while it appeared early last year that 
the economy was turning a corner, we stumbled again due to 
factors like the earthquake in Japan, the rise in energy 
prices, the continuing economic turmoil in Europe and the 
still-struggling housing market.
    However, since the end of 2011, shortly after the Fed 
launched Operation Twist, the economy has shown signs of a 
sustained recovery. Last week, new claims for unemployment 
benefits reached a four-year low. Over the past six months, the 
U.S. has seen the highest consistent numbers of jobs created 
since 2006, and consumer confidence is at its highest level 
since 2004, according to a March 22nd Bloomberg report.
    Moreover, the fears announced by critics of the Fed's 
policies have simply not been proven correct. The monetary 
easing actions have had such a minimal impact on inflation that 
Reuters recently posed the question ``Where is the inflation?'' 
The Brookings Institution economist Barry Bosworth stated 
recently ``There's been no collapse of the American dollar. The 
dollar was declining up to the financial crisis and then shot 
up in value, and we're still not back to where we were before 
the financial crisis started.''
    Finally, I note that while some have tried to link the 
spike in oil prices and commodities to the Fed's monetary 
easing policies, the Congressional Research Service examined 
this issue and rejected any causal relationship. Most experts 
have pointed to traditional factors, such as supply and demand, 
as well as the increasing role of speculators in driving up 
prices at the pump.
    The one area of our economy that continues to struggle is 
employment, and this is the area that the Vice Chairman's 
legislation would require the Feds to ignore. I could not 
disagree more. I commend Chairman Bernanke and the other 
Federal Reserve governors for continuing to pursue the 
objective of maximum employment, while drawing Congress' 
attention to the actions that it could take to support higher 
employment.
    Unfortunately, Congress has failed to implement these 
actions, a failure that I find deeply troubling, given that 
there are millions of unemployed Americans who could benefit 
from the Congressional actions recommended by the Fed. Again, I 
thank the witnesses for joining us today, and again, Mr. 
Chairman, I thank you.
    [The prepared statement of Representative Elijah E. 
Cummings appears in the Submissions for the Record on page 45.]
    Vice Chairman Brady. Thank you, Mr. Cummings. Let me turn 
to questions. One, again thank you to the panel. The goal of 
introducing this legislation is to have a thoughtful, 
constructive discussion on what role we want the Fed to play 
going forward, to create the strongest foundation for economic 
growth and output in the United States, and to have a clear 
mandate from Congress, in which we hold the Fed accountable to 
that mandate, without confusion going forward.
    As we talked to policymakers in Washington about this 
issue, and the public as well, there are sort of two myths that 
arise quickly, and because Dr. Poole and Dr. Taylor referenced 
it in their testimony, I'd like you to comment on it, if you 
would. The first is that a single mandate on price stability 
will then ignore unemployment issues.
    We're at over eight percent unemployment. Jobs are a 
critical feature, a critical desire of our country. You know, 
how can we move to a single mandate during these times? The 
other myth is that somehow, a dual mandate is etched in stone, 
that it would be an unusual move to focus back on the 
purchasing power of the dollar.
    But in fact, you know, of the 30 plus central banks around 
the world, the vast majority of them put the single mandate, 
price stability, as either their sole or their primary focus. 
In fact, the greatest period of time in U.S. history economic-
wise is associated with the single mandate focused on price 
stability, that we've in fact won two Cold Wars, put a man on 
the moon and grown our economy dramatically without a dual 
mandate.
    So I'd like Dr. Taylor and Dr. Poole to address those two 
myths, that this somehow would cause the Fed to ignore the 
business cycle and employment issues, and that a movement back 
to a single mandate is somehow unusual. Dr. Taylor.
    Dr. Taylor. Thank you. The single mandate, single goal does 
not preclude the Federal Reserve from providing lender of last 
resort or providing liquidity in a panic. It does not preclude 
the Fed reducing interest rates in a recession. These are part 
of the ways that you implement the single mandate. I certainly 
made that clear in my research for many years, that the mandate 
is a way to get the Fed from doing more harmful things, the 
single mandate. You can point, as people have, to the good 
record on inflation.
    But in the meantime, the record on other things has not 
been good. We have had the Great Recession. We have had a 
financial panic. We have had a very slow recovery, and I think 
you can point to actions of the Federal Reserve as significant 
factors in these events. I mentioned the very low interest 
rates in `03, `04, `05. That was in a sense an intervention, an 
extra intervention of the kind that they would not have done in 
the 80's and 90's.
    More recently, the interventions and the quantitative 
easing causing confusion, not knowing whether they had an 
impact or not, when they're going to continue, when they're 
going to stop, and how do you reduce this gigantic balance 
sheet. These are all things that I think are negative with 
respect to economic growth and employment. The Fed, of course, 
has capabilities of avoiding these interventions, as it did, as 
you mentioned, in much of the 80's and 90's.
    But the legislation such as the Sound Dollar Act would 
assist the Federal Reserve, would incentivize the Federal 
Reserve, and help encourage that kind of better economic 
policy.
    Vice Chairman Brady. Thank you, Doctor. Dr. Poole.
    Dr. Poole. Congress could certainly adopt a two percent 
inflation target, could support the Federal Reserve's decision, 
the FOMC's decision that was announced on January 25th. The Fed 
was clear in the memo that it sent out, the press release on 
that, that it could not adopt an unemployment target, a 
percentage, because that was not within the control of monetary 
policy.
    I don't see anything inconsistent here. Congress could have 
an objective of lower unemployment, understanding that that 
objective would have to be pursued through fiscal policy and 
regulatory means, but not assigned to the Federal Reserve. So I 
don't understand that the legislation that we're talking about 
here would downgrade in any way unemployment as an objective, 
as a national objective.
    It is certainly a national objective. It's just that the 
things that create unemployment are not subject to being fixed, 
if you will, by Federal Reserve policy. Now having said that, I 
want to emphasize that the Federal Reserve, with confidence in 
the markets about price stability, can cushion disturbances in 
the unemployment rate, and can act to help steer the economy in 
the right direction, in terms of employment and economic 
growth.
    But that's not the same thing as saying that the Federal 
Reserve can achieve a numerical target or ought to be assigned 
a numerical target for the unemployment rate.
    Vice Chairman Brady. Thank you, Dr. Poole.
    Senator DeMint.

OPENING STATEMENT OF HON. JIM DEMINT, A U.S. SENATOR FROM SOUTH 
                            CAROLINA

    Senator DeMint. Thank you, Chairman Brady. I appreciate you 
all being here, and I think I'm going to address my question 
mostly to Dr. Taylor, because he brought up this idea of a 
rules-based system, versus one that's more arbitrary, which 
really gets at, I think, a fundamental question about what kind 
of country we're going to be. Are we going to be a rule of law 
or rule of men? I think what you're saying is it appears now 
that it's very much a rule of men and opinions about what we're 
doing.
    My concern is multi-dimensional, in the sense that when it 
comes to our monetary value, there's no standard, no gold 
standard, no standard of any kind. When it comes to monetary 
supply, there's criteria, there's no standard. You would think 
there'd be some relationship between the monetary supply and 
the size of our economy or the growth of our economy.
    But there's nothing there, and so we've got no 
institutional discipline on one side, and the other side of the 
employment mandate, I've sat through a number of hearings with 
Chairman Bernanke, and it's very clear, since economies 
worldwide are now interwoven, that that's a clear directive, to 
intervene and be involved in economies all over the world.
    So we have no institutional discipline that would--no 
rules-based system, and all the incentives are for our Federal 
Reserve to try to manipulate and control economies all over the 
world, because it affects our employment here at home. There 
seem to be other perverse incentives, and it seems the Federal 
Reserve is now playing a major role in our national debt, in 
the sense of underwriting it and in effect owning part of it.
    As I try to connect all the dots, I become very concerned 
that we have created a deck or really a house of cards, that we 
don't know which the first one is going to fall. But there's 
clearly not a system built on any kind of foundation that could 
be predictable. I know that's not exactly a question, but I'd 
just love to hear you talk a little bit more about where we 
are.
    Certainly, all of us are concerned about employment, but an 
unpredictable monetary value and supply seems to be the biggest 
danger we have to long-term employment. So I'll just turn it 
over to you.
    Dr. Taylor. Thank you very much, Senator. I think we have 
lots of experience that's consistent with your concern. Policy 
was very unpredictable in the Great Depression. Monetary policy 
was very unpredictable in the mid-60's and 70's. Policy was 
much more predictable in the 80's and 90's, and times were good 
then, and now policy has become unpredictable again and things 
are not going well. So I think there's lots of evidence, 
historical individual studies that are consistent with what 
you're saying.
    I'm concerned now because, as you suggest, there seems to 
be no limit to the discretion that the Federal Reserve can 
undertake right now. If it wants to go buy another $100 billion 
of anything, it simply credits the banks with reserves, and 
goes out and uses the money. It used to be that there was some 
discipline with the supply and demand for money determined in 
the interest rate. But the Federal Reserve just sets the 
interest rate by paying a certain amount on deposits at the 
bank.
    So I think we've moved into really an completely 
unprecedented area. I would think one way to characterize this 
is the Fed has replaced the interbank money market with itself. 
The Fed has replaced large segments of the government 
securities market with itself. Early in 2009-2010, the Fed 
replaced large segments of the mortgage-backed securities 
market with itself.
    So this creates an enormous amount of discretion, decisions 
by authorities, rather than by rules, and we don't know exactly 
what the outcome is going to be. I wouldn't point to the fact 
that people are, some people are forecasting low inflation and 
be complacent. It could be the opposite kind of effect. It 
could be an effect which could be contractionary before we're 
all finished.
    So I agree with you entirely. We have so much evidence that 
says a more rules-based policy works better. That's not where 
we are now, and I think we should get there as soon as we can, 
and I think legislation like this will help.
    Senator DeMint. Thank you, Mr. Chairman.
    Vice Chairman Brady. Thank you, Senator. Mr. Cummings.
    Representative Cummings. Thank you very much. Dr. Meyer, 
you testified that restricting the Fed to only holding short-
term government securities would eliminate the FOMC's ability 
to do quantitative easing; is that correct? Is your mic on?
    Dr. Meyer. Yes.
    Representative Cummings. Do you have any sense of how much 
lower GDP would be and how much higher the unemployment rate 
would be if the Fed did not engage in QE1 or QE2?
    Dr. Meyer. There's always going to be some controversy 
about something that has to be determined through models. We've 
studied it, the Board staff has studied it, and so why don't I 
just share with the Committee what the Board staff, it's really 
three Board economists and the economists at the San Francisco 
Fed.
    Concluded their model, state of the art, they found that 
QE1 and QE2 collectively saved three million jobs, lowered the 
unemployment rate 1\1/2\ percentage points over two years. Now 
I don't want to go to the wall and defend those precise 
numbers. Our study showed something that was a little more than 
half that big. But even that is meaningful.
    These policies have lowered interest rates very 
substantially by between 75 and 100 basis points, including 
Operation Twist. QE1 and QE2 have stimulated aggregate demand. 
They've improved financial conditions.
    So I think they've done what they were expected to do. But 
I don't want to give you the false impression. At this point, 
there's really very little that the Fed can do. There's an 
understandable reluctance to expand the balance sheet much 
further, rates are already zero at the short end. We're close 
to being in a world without policy. Fiscal policy around the 
world is going in the wrong direction from a stabilization 
standpoint, perfectly understanding in terms of long-run 
sustainability and growth, and monetary policy has little left.
    That's why the Chairman has emphasized that the ball's in 
your court. You're the ones, if anybody, who's got to be 
thinking about full employment, dealing with how many people 
are out of work, and you have to decide whether you're willing 
to fulfill that responsibility.
    Representative Cummings. Now the panel has a difference of 
opinion on limiting the FOMC's purchases. Dr. Taylor, you 
testified that the Fed's purchases of mortgage-backed 
securities had no impact on the mortgage interest rate. Do you 
agree with that, Dr. Meyer?
    Dr. Meyer. Oh absolutely not, and I'm aware of many, many 
studies done by academics, done by the New York Fed as well as 
our own, that show that purchasing mortgage-backed securities 
have at least the same influence on interest rates as MBS, 
because as we say, they have taken duration out of the markets. 
They take that duration onto their portfolio. And, if anything, 
MBS should have a greater effect, because it shrinks the credit 
risk on mortgages, lowers mortgage rates relative to government 
rates.
    So no. There are always, we say, two economists, three 
opinions. I have a lot of respect for John, a lot of respect. 
But we've really disagreed. There are a lot of academics, a lot 
of other studies that have been done, that get eerily identical 
impacts on interest rates. So there is a difference of opinion.
    Representative Cummings. A February 1st, 2012 Bloomberg 
editorial titled ``Federal Reserve Dual Mandate Shows Bernanke 
Model Working Better in Crisis,'' states this, and it says 
``The Federal Reserve Chairman Ben Bernanke's focus on full 
employment and price stability is being validated, as the U.S. 
expansion gains speed, and his counterparts in Europe emulate 
his approach.'' Dr. Meyer, do you agree with that observation?
    Dr. Meyer. I think I'm going to read a quote from the 
Deputy Governor of the Riksbank Bank, the leading scholar, 
absolutely leading scholar in the world, on monetary policy 
strategy, Lars Svensson. ``What has happened in the past is you 
have had a single mandate, but in practice, you have behaved as 
if it has been a dual mandate, and I think that has been for 
good reason. It's better for both inflation and the real 
economy if you behave as though you had a dual mandate.''
    So let's be very clear. There is no central bank in the 
world that operates as if it has a single mandate, not a single 
one. You can look at their mandates. They all talk about other 
things. You know, encouraging employment, etc. No. Is that what 
you want? You want the Fed to be different from every other 
central bank in the world. I'll give you another example. Some 
FOMC members say the Fed has a flexible inflation targeting 
regime. That's how close they are.
    I've talked to many central bankers from flexible inflation 
targeting countries. They all say, what's the debate? We're 
identical to a dual mandate. So you're talking about something 
not like practiced around the world, not at all. You're talking 
about being unique, doing something that no other central bank 
would do, and I think you're right. I don't want to say that 
the monetary policy committee in the UK and the ECB just 
followed the U.S.
    But Bernanke has been the leader. He wrote the classical 
paper of what to do in situations like that, and I would say 
that others have followed his lead, for the betterment of the 
U.S., their economies and the global economy.
    Representative Cummings. Thank you, Mr. Chairman.
    Vice Chairman Brady. Thank you.
    Senator Lee.

  OPENING STATEMENT OF HON. MIKE LEE, A U.S. SENATOR FROM UTAH

    Senator Lee. Thank you very much. I appreciate each of you 
for joining us today. I think this an important issue, one that 
frequently doesn't get the attention that it deserves. There 
are some things about our current monetary policy that trouble 
me. One of them is what I perceive to be something of a 
symbiotic, almost codependent relationship between Congress on 
the one hand, and the Federal Reserve on the other hand.
    You have Congress spending money that it doesn't have, 
issuing additional Treasury instruments, debt instruments to 
finance that spending, and it does so really to avoid the 
political consequences that would be associated with either 
budget cuts, on the one hand, or tax increases on the other 
hand. The Federal Reserve, for its part, keeps interest rates 
often artificially low, in ways that may mask the true cost 
associated with uncontrolled, out of control government 
spending.
    Meanwhile in so many ways, these practices tend to impose 
new, additional and hidden costs on Americans, costs that 
create distortions on the marketplace that are not always 
accounted for in standard government measures. So you have 
Congress, the political institution that is supposed to be 
accountable to the people, in effect insulating itself from 
accountability, transferring some of that authority, and with 
it the responsibility and the accountability, to another 
institution, the Federal Reserve, which while consisting of 
very smart people, I will certainly give them that, is not 
representative.
    These are not elected people. They're not accountable to 
anyone who is elected really, at the end of the day. They meet 
in secret. They may well have the best of intentions, the best 
of motives, and the best educational backgrounds. But they are 
not accountable to the people. This is troubling to me. It's 
part of what facilitates monetary policy that I think is 
unsound. The time is now to move towards a sound monetary 
policy, and I hope that we can see that.
    Now I'd like to ask Doctors Taylor and Poole to respond to 
Dr. Meyer's assertion that there is, in effect, a dual mandate 
system in essentially every central bank throughout the world. 
Do you agree with that?
    Dr. Taylor. Well no. In fact, there are wide differences in 
the instructions given to central banks at this point, and some 
follow them more closely than others. I think what you need to 
look at is what central banks actually do, and in fact during 
the 80's and 90's, the Federal Reserve starting with Chairman 
Volcker, decided that the dual mandate, which was put in place 
in 1977, during the height of an interventionist period, was 
best interpreted as a focus on price stability, focused on 
getting inflation down and not try to do a bunch of other 
things.
    It was tremendously successful not only in getting 
inflation down, but getting unemployment down and getting 
economic growth up, and remarkably, making recessions less 
frequent and expansions longer. So it's a tremendous 
improvement. Unfortunately, his interpretation, as he stated at 
the time, is no longer the current interpretation.
    Now it's completely switched, and the Federal Reserve 
officials now explicitly state the dual mandate as the reason 
for all these interventions. Because of the dual mandate, we 
were going to do QE1 or QE2 or Operation Twist. The Federal 
Reserve didn't refer to the dual mandate explicitly all those 
years with Volcker.
    So that's why I think more than ever, we need to have some 
kind of legislation like this, that makes the Federal Reserve--
Congress has responsibility, of course, for the Federal 
Reserve. You don't want to micromanage it. But you want to give 
it this general idea of what its responsibilities are.
    Now let me just say with respect to the question on the 
specific impacts, I did one of the first studies on the 
mortgage-backed securities purchase program, and this is before 
the Federal Reserve actually did the studies, and found it had 
no significant effect, controlling for pre-payment risk and 
other kinds of credit risk.
    There are studies, mainly at the Federal Reserve, not a 
surprise after all, that find it has impacts. They have a 
different methodology. I don't think it is appropriate. I've 
seen that kind of methodology fail in the past. But I think 
most of all, there's a great deal of uncertainty about the 
impacts of these programs, in terms of being positive, but 
there is not much uncertainty that they brought the Fed into 
this unprecedented degree of intervention and a gigantic 
balance sheet, which is uncertain how it's going to be 
resolved, and that's my main concern.
    Senator Lee. I've got seven seconds left. Dr. Poole, can 
you add something? Do you want to add anything to that?
    Dr. Poole. Maybe not in seven seconds. I can't talk that 
fast.
    Senator Lee. I'll get to you next time around, then.
    Vice Chairman Brady. All right. Thank you very much. I'd 
like to stay focused on the issue of credit allocation. I 
believe in an independent Fed with a dedicated source of 
revenue. But I just believe the Federal Reserve allocating 
credits to specific segments of the market helps politicize the 
Fed, and it also makes it--creates problems as it tries to 
unwind its position when inflation pressures increase.
    So I would ask this of each of you. From an independence 
standpoint, does the Federal Reserve's credit allocation policy 
threaten its ability to conduct its monetary policy 
independently?
    Dr. Taylor. Very briefly, I believe it raises questions 
about why an independent agency of government should be taking 
on responsibilities that are more appropriate for the Congress 
and the appropriations process. There is not a theoretical 
rationale for that; just politics. So I think it does raise 
questions, legitimate questions, and that's why I think we 
should try to have the Fed do much less of that credit 
allocation in the future.
    Vice Chairman Brady. In sum, we basically limit those 
purchases to Treasuries going forward, those assets, except for 
very unusual circumstances. Dr. Meyer.
    Dr. Meyer. A principle of monetary policy should be 
neutrality, and that means only operating in government 
securities. So in principle, I agree with that. Now here's the 
problem. The Fed now holds on its portfolio about a trillion 
dollars' worth of agency securities. It holds $1.6 trillion of 
Treasuries, and said it can't buy anymore without dysfunction 
in the Treasury market.
    So this again is an attack on quantitative easing. What 
you're saying is take away that $1 trillion; you shouldn't have 
done it. Well, I think it had a big impact on the economy. So I 
think we have to--I agree with you as a point of departure. I 
would have said exactly what you say. You've got to hold your 
nose, okay, if you're going to buy MBS. It was extremely 
unfortunate.
    But I am conflicted in this particular case, because the 
Fed has reached the limits, would have reached the limits of 
what it can do in Treasuries, and its portfolio would be almost 
half as large as it is today, if it didn't have the authority, 
which it did have, to buy MBS.
    Vice Chairman Brady. Thank you. Dr. Poole.
    Dr. Poole. If I accept all of Larry's judgments about the 
extent to which mortgage rates were reduced, I continue to 
insist that that reduction did nothing or practically nothing 
for the moribund housing market. Nor did it do anything for the 
people who were suffering from foreclosures and financial 
distress and upside down mortgages, because they couldn't 
refinance mortgages.
    So almost all the refinancing that took place created new 
mortgage-backed securities, and those are the people who were 
assisted by this policy. Now who are the people who lost? I 
mean if I gained, who are the people who lost? Well, the people 
who lost, some of them were people living on fixed incomes, who 
had the rate of return on their portfolios reduced. So there's 
a transfer from them to me.
    Some of the people who lost or will lose will be the 
federal government, because the Federal Reserve is taking a 
lower rate of return on these mortgage-backs, and may actually 
in time, as interest rates rise, lose capital values as well. 
So the program helped me, thank you, it helped me and others in 
like circumstances, but did very, very little for the 
underlying core of the problem in the housing market. It was 
sold for doing that, but it did not have that effect, could 
not.
    Vice Chairman Brady. Dr. Poole, does inflation telegraph 
its punch? I mean is there not the belief that the Fed has to 
start withdrawing its accommodative policies and accommodations 
ahead of inflation taking root? I recall in 2007 in this room 
being told, being assured there were no asset bubbles. The 
economy was moving along great. We know what the end result 
was.
    Can inflation also take root before the Fed begins to 
withdraw what is a very unprecedented and aggressive position 
in those mortgage-backed securities?
    Dr. Poole. Well of course it can, and the issue is whether 
the Federal Reserve will act in a timely fashion, to prevent 
the inflation from taking hold. 1994 is a really good example. 
Alan Greenspan emphasized that the tightening of monetary 
policy that year was preemptive. The Fed was tightening policy 
so that inflation would never have a chance to take root, and 
he was successful and it did not have an adverse effect on the 
unemployment rate.
    So yes, you want to withdraw the excessive expansionary 
force of monetary policy before inflation takes effect, and I 
don't think there's any disagreement here on this panel about 
that.
    Vice Chairman Brady. I was just making a point. I'm worried 
the politics as that begins to happen will be driven up 
substantially on----
    Dr. Poole. Well, the politics of that will be that as 
interest rates rise, as they must when the economy recovers, 
more than it has already, it's going to cause an explosion in 
the interest expense line in the federal budget, because there 
is an ever-growing amount of government debt outstanding, and 
when you start applying higher and higher interest rates to 
that outstanding amount of government debt, it's going to cause 
a very large increase in the federal budget expense component. 
It's going to make it that much more difficult for fiscal 
policy to get itself on the correct course.
    Vice Chairman Brady. Thank you, Dr. Poole.
    Senator DeMint.
    Senator DeMint. Well, I've appreciated the discussion. 
We're really getting at a much bigger issue that I think our 
country is dealing with. As I hear you talk and the 
disagreement, it's really the centrally planned and managed 
economy that Dr. Meyer is talking about, or do we have a free 
market economy with a stable monetary measure of values and 
transactions?
    It's not so much a question of whether it works or not, or 
whether this study says we created a million jobs or whether we 
didn't. The question is should the Federal Reserve be 
attempting to manage our economy and economies all over the 
world through monetary policy, and in effect encouraging more 
national debt by helping to, in effect, mask the effect of that 
debt by buying our own debt.
    We frankly, I don't think, know what our interest rates 
would be if the Federal Reserve had not intervened, and now 
their back's against the wall, as Dr. Meyer says, and they 
really can't go any further. So we're not sure what's going to 
happen. But I don't know that I have a question in all of this, 
except that it does appear to be--you've got a question, Dr. 
Meyer. Since I've named you in this, I'll let you ask me a 
question here.
    Dr. Meyer. Okay. Senator DeMint, with all due respect----
    Senator DeMint. Thank you.
    Dr. Meyer. Do you think this hearing and the discussion 
about the Federal Reserve is really about a centrally planned 
economy versus a free market economy? Come on, come on. Give me 
a break.
    Senator DeMint. Well, I'll answer that, because it's not 
just this hearing. It's the ones, a number of hearings that 
I've sat through, and the assurances you give us that things 
are working are very similar to the assurances that still haunt 
us today about Fannie Mae and Freddie Mac, that there's no 
problem with that type of subprime mortgages or whatever.
    So we're not trying to be disrespectful, but hopefully 
intelligently cynical, because the information we've got over 
the last decade or so has not proved to be true, on what is a 
problem and what's not. But it really is, if you listen to the 
fact that the Federal Reserve does have a role in our economic 
system, in determining really how the economy works in 
employment, and economies all around the world, it's not just 
what I've heard here today.
    But when Chairman Bernanke is talking, he's clearly talking 
about how--I almost feel like a puppeteer. He's telling me how 
he's pulling the strings, and while it may be for all good 
intentions, there is a fundamental difference in a free market 
economy with a standard monetary system, and what we know 
through history as centrally planned economies. Dr. Taylor.
    Dr. Taylor. I think there's a relationship between the more 
discretionary monetary policy, less rules-based monetary policy 
we've seen now, and other kinds of policies, whether it's 
fiscal policy or regulatory policy. I think that's one way to 
characterize what you're driving at. I just finished a book 
where I trace that these trends to more interventionism, less 
interventionism, more government intrusion, less government 
intrusion characterize movements not just of monetary policy, 
but also fiscal policy.
    I believe you can see that currently. There is so much, has 
been so much emphasis on these kind of short-term stimulus 
packages, whether it's the 2008 package to stimulate the 
economy, or the 2009 stimulus package or first-time home buyers 
or cash for clunkers.
    There's a whole long list of actions on the fiscal side, 
that have the same characteristics of less predictability, more 
interventionism, and I believe that is a problem that we're 
facing, not just with respect to monetary policy, but fiscal 
policy and also regulatory policy. I think people should 
understand that, that it's a historical movement, and I believe 
it's harmful.
    Senator DeMint. Thank you.
    Dr. Poole.
    Dr. Poole. In terms of the regularity, the predictability 
of the policies of the Federal Reserve, I believe strongly that 
the Fed should be confined to Treasury market, and this is part 
of this discussion, because if the Fed can buy any assets that 
it wants under conditions that it specifies, then where is that 
going to take us? That's what's happened. The Fed has provided 
credit in a variety of directions during the financial crisis, 
on the argument that it was necessary to deal with the 
financial crisis.
    But as we go through time, the Fed can make this argument, 
it seems to me, in a variety of different circumstances. Now if 
you want to say that we're never going to have a financial 
crisis, that this is all permanently behind us, that there will 
never again be any occasion where the Federal Reserve might be 
called upon or believe that it's its responsibility to enter 
this market or that market, I don't think that's true.
    So that's why I feel quite strongly that the Fed has gone 
off, has made a mistake. I understand the motivation for doing 
it, and I understand Larry Meyer's argument for the Fed doing 
it. But the Fed did not need to do it. The Fed could have asked 
the Treasury to buy the MBSs, and the Fed, or whatever else the 
Treasury wanted to buy, and then the extra government debt 
created that way would have been available for the Fed to buy 
if it wanted to do so.
    So I just don't accept his argument that the only way to 
expand the monetary base, have the quantitative easing, was to 
buy the MBSs, and of course there were these other programs, 
the commercial paper funding facility that was not chump 
change. The Federal Reserve bought commercial paper amounting 
at one point to $350 billion, and I think you know the list of 
companies, or you can find out the list of companies to which 
the Fed lent money.
    What is to limit this process? I think there is no limit on 
it, as we now stand.
    Senator DeMint. I know we're out of time, but Dr. Taylor, 
your point is true. When you talk to people who create jobs, 
they don't know what the Federal Reserve's going to do, they 
don't know what the politicians are going to do, they don't 
know what the regulators are going to do. That's no way to 
operate in a rule of law country.
    Vice Chairman Brady. Thank you, and I will make sure Mr. 
Cummings has extra time during his questioning. Mr. Cummings.
    Representative Cummings. Thank you very much, Mr. Chairman. 
Dr. Meyer, back on March 2nd, 2011, in a Congressional Research 
Service report titled ``The U.S. Trade Deficit and the Dollar 
and the Price of Oil,'' CRS finds that the Fed's monetary 
policy actions have not been the main driver of higher oil and 
gas prices. The report explicitly rejects any direct cause and 
effect relationship between changes in the value of the dollar 
and the price of oil.
    Dr. Meyer, can you comment on the suggestion that the 
Federal Reserve monetary policy is a key driver of oil price 
fluctuations?
    Dr. Meyer. Yes, happy to do so. I think it should be very 
clear that the price of oil increased in kind of two phases. 
One was the unexpectedly sharp rebound in the global economy, 
with global growth very high, for example, in 2010. Commodity 
prices are the most cyclically sensitive variable in the world. 
Of course commodity prices were going to rise. Then we had 
supply considerations, geopolitical, and it increased further.
    Now I'm not going to say that there's no impact of monetary 
policy. No. That's not quite true. It's very secondary and it's 
small. But just to give you a sense here, the most direct link 
is that when you lower rates, you lead to a depreciation of the 
dollar, a great thing. But that puts upward pressure on 
commodity prices.
    Now there's been a lot of studies of that. You've got to 
put it into perspective. That's a very small effect. I like to 
tell it like it is. So that's an effect that's there. It's 
logical, it's empirically-based, but it's very small.
    Representative Cummings. Well, some have argued that the 
Federal Reserve's accommodative monetary policy has driven down 
the foreign exchange value of the dollar, thereby boosting oil 
prices. But since their recent low in February 2009, oil prices 
have rebounded about a 150 percent, whereas the broad nominal 
index of the dollar has fallen by only 15 percent. Thus, Dr. 
Meyer, isn't it true that the dollar's decline can at most 
explain only a small part of the rise of oil prices?
    Dr. Meyer. Absolutely, but let me go a little further with 
exchange rates, because I know that the Sound Dollar bill, it 
doesn't talk a lot about it, but I think it has it in mind too. 
You asked the Congress to report to you in that bill on the 
impact of monetary policy on exchange rates. So let me save the 
Chairman a visit, okay.
    When monetary policy eases, it is inevitable that the 
dollar will depreciate. Rates will fall, and that will create 
capital outflows from the United States, and that will lead to 
a depreciation of the dollar. So what do you say about it? I 
say thank God. I mean that's how you get stimulus or monetary 
policy in an open economy.
    You get it in part by lowering borrowing costs; you get it 
in part by raising asset prices; and you get maybe a third of 
it by stimulating net exports. Very important. That's the 
importance of monetary policy. The Fed has no target for the 
dollar. Indeed, there is no target for the dollar anywhere. 
There is no instrument. There is no such thing as dollar 
policy. It's a myth.
    Representative Cummings. Further, in March 2011, Bart 
Tilton, Commissioner of the U.S. Commodity Futures Trading 
Commission, warned about the impact of speculators on oil and 
gas prices. His concerns were recently confirmed in a March 13, 
2012, CBS news report, in which Mr. Gayle, a managing director 
and senior analyst covering the oil and gas sector for 
Oppenheimer and Company, Inc., stated that 75 percent of what 
Americans pay for gasoline comes from the cost of crude oil.
    He went on to say that the primary Government policy that 
could address the price of gas would be to crack down on 
speculation in oil markets, which he suggests has added 30 
percent to the global price of crude. To all of the panelists, 
do you believe that if Congress stripped the Fed of its dual 
mandate to promote price stability and maximum employment, it 
would materially impact the price of oil?
    Dr. Meyer. No. But let me say, it's a terrible idea for 
Government to intervene and try to stop what it thinks is 
speculation. I don't know how they would define it. One 
person's speculation is another person's investment. Commodity 
investments have soared, for good reason. Portfolios are under-
represented in real assets; I don't want to give investment 
advice, but it's reasonable for everybody to have a share of 
their portfolio in some type of real assets.
    And yes, and that has driven up the price of commodities to 
some extent. I can't tell you sort of how much, but this is 
really unrelated to the Fed's mandate. It's a whole different 
issue.
    Representative Cummings. Dr. Taylor.
    Dr. Taylor. I think that there is an impact of monetary 
policy, whether it's too easy, which is the concern of many, or 
even if it's too tight, on other central banks, and therefore 
on commodity inflation or oil price more generally, because 
these are globally traded products.
    We have lots of evidence that smaller central banks, the 
Central Bank of Norway, Central Bank of Mexico, they will hold 
their interest rates lower than they otherwise would, if the 
Fed has low interest rates. So that tends to itself induce 
extra inflationary pressures globally, which can affect 
commodity markets.
    We've seen that, and it is a concern. So to the extent that 
that kind of policy is discouraged, because it tends to be more 
interventionist, by something like the Sound Dollar Act. I 
think it will discourage, actually discourage some of the 
speculative behavior you have, because central banks will 
therefore--other central banks will be able to find their 
policies more appropriate, and not be driven into these easier 
policies by the Federal Reserve.
    Representative Cummings. Dr. Poole.
    Dr. Poole. The pricing of all assets, land, gold, 
commodities, stocks, bonds, pricing of all such assets is 
heavily influenced by expectations about the future. You don't 
want to hold it today if you think the price is going to go 
down, and that is the essence of what you might call 
speculative activity, as a consequence of the fact that the 
asset is storable.
    So this is a characteristic of all asset prices, and it is 
also true that whenever asset prices go up, when people are 
unhappy about that, they appeal to speculators as being the 
cause, and it is somehow a problem. It is somehow inconsistent 
with the way markets are supposed to function, and I reject 
that view completely.
    Now what worries me about the current circumstance is that 
the high oil prices that we now have, attributed perhaps 
correctly, I don't know, to the heightened tensions in the 
Middle East, might in fact instead be importantly a reflection 
of a world economy that is stronger than we had anticipated, 
including a U.S. economy, that this would be a symptom of 
economic strength rather than a force that would tend to 
depress growth.
    That is, when you have a strong economy, it drives up 
certain prices, and if we are misinterpreting the current 
increase in the price of oil as a negative for the economy, 
rather than as a sign of economic strength, then we may well 
have a monetary policy error coming from it.
    Representative Cummings. Thank you very much, Mr. Chairman.
    Vice Chairman Brady. Thank you.
    Senator Lee.
    Senator Lee. Thank you. Dr. Poole, as promised, I'm going 
to give you time to respond to what Dr. Meyer had said with 
regard to kind of a de facto dual mandate standard among 
central banks around the world. Care to respond?
    Dr. Poole. No. I think that's correct. But one thing that 
he did say along the way, is that there is, I think he used the 
word ``hierarchy'' in the employment and price mandate or 
objective. That hierarchy is once we lose price stability, then 
we also lose employment stability, and the central bank also 
loses the flexibility to respond to the real economy, to the 
employment situation.
    A very good example is what happened in the late 1970s. As 
the markets lost confidence in the Federal Reserve, because the 
Federal Reserve kept feeding money into an inflationary 
economy, kept saying it was going to bring inflation down; 
inflation kept rising. At that point, the Federal Reserve also 
lost, I'll say power, to have a constructive influence on 
unemployment.
    So when Paul Volcker came into office, he understood that 
the first thing he had to do was to restore Federal Reserve 
credibility, because that was important both for the inflation 
objective, but also for the employment objective.
    Senator Lee. Is it your assessment that Chairman Volcker 
did restore that credibility? Did he succeed in doing that?
    Dr. Poole. Oh absolutely.
    Senator Lee. How would you compare the credibility of the 
Federal Reserve under the leadership of Chairman Volcker, to 
the credibility of the Federal Reserve today?
    Dr. Poole. What I--my sense of the history here would be 
that it took a little while for the markets to have really a 
very high degree of confidence in the Federal Reserve. Volcker 
hung on through a difficult recession that took the 
unemployment rate to what, 10.6 percent? He had the support of 
President Reagan, and over time, with the success of that 
policy, the Federal Reserve position grew stronger. Market 
credibility improved.
    That continued to strengthen through the tenure of Chairman 
Greenspan. I believe that the market still has a very high 
degree of regard, very high regard for Chairman Bernanke, but I 
believe it is not as solidly entrenched as it was under 
Greenspan. That is, it would be easier for there to be a policy 
mistake, and for inflation expectations to take hold.
    Senator Lee. Thank you. Dr. Taylor, based on the rate at 
which Congress is spending, the rate at which Congress is 
engaging in deficit spending, and based on where you see U.S. 
Treasury yield rates going in the next few years, do you have 
any predictions, or do you have an ability to predict how long 
it might be between now and the time that we can expect to be 
paying a trillion dollars a year in interest on our national 
debt?
    Dr. Taylor. Well, it's very hard to forecast when rates are 
going up, but they're going up probably more than the forecast 
of CBO. There's certainly a risk of that, in which the case 
deficit will get worse. I don't want to predict a particular 
date, but it's clear right now that unless policy changes, the 
debt is going to continue to rise as a share of GDP. Interest 
payments will grow rapidly as a share of the budget and of 
course as a share of GDP.
    I don't see any change right now in that. The last time CBO 
made a forecast of the debt to GDP ratio long term, which was 
last summer, and of course it just like skyrockets to hundreds 
of percent. The United States of America won't be the United 
States of America if that happens.
    So I think it's a great concern. This hearing is not on 
fiscal policy, but that's an extraordinarily important problem 
to fix. I mean the relationship to the Fed is the extent that 
the Fed tends to monetize that debt. It becomes more of a 
problem down the road, and we need to be concerned about that. 
Of course, they say they want to undo it and I hope they do. 
But in the meantime, they've set some precedents.
    So I think it's most important on the fiscal side to adopt 
a budget which gradually reduces spending as a share of GDP. I 
recommend coming back to the 2007 levels as a share of GDP; 
that's 19\1/2\ percent, and really take this fiscal 
responsibility that the Congress and the President have, and 
deal with it now.
    Senator Lee. Do you think it's plausible or reasonable to 
expect that Congress is likely to make significant cuts, to 
bring the debt to GDP ratio down, bring our deficits down, as 
long as interest rates remain as low as they are now?
    Dr. Taylor. I think it's the right thing to do. It's really 
going to be the debate in this election year. You have a 
proposal from the House of Representatives, a budget which does 
that. You have a proposal from the President which doesn't do 
that. It's going to be part of the election, and as speaking 
objectively, not trying to predict the politics or predict the 
election, it is doable, to fix this problem in a gradual, 
credible way, and I'm arguing for it all the time in other 
fora.
    So I can't predict, Senator, but I believe, I have a faith 
that when people see the numbers, when they see the charts, 
when they understand what's at stake, that the American people 
will respond.
    Senator Lee. Thank you.
    Vice Chairman Brady. I want to thank the members of the 
Committee for being here today for their questioning, and our 
witnesses as well. This is the type of discussion we want going 
forward, and I really think there is strong bipartisan support, 
when members think about it, about getting the role of the Fed 
right for the future, ensuring we have the strongest foundation 
for economic growth and low inflation, and how the Fed's role 
impacts that, and on ensuring the Fed is politically 
independent as it goes forward in time.
    So I want to thank the discussion today, again for our 
witnesses, and I look forward to future hearings on this 
matter. This hearing is adjourned.
    [Whereupon, at 3:48 p.m., the hearing was adjourned.]

                       SUBMISSIONS FOR THE RECORD

 Opening Statement of Representative Kevin Brady, Vice Chairman, Joint 
                           Economic Committee

    Today's hearing seeks to determine what role the Federal Reserve 
should play going forward to ensure that the United States has the 
world's strongest economy in the 21st century.
    A sound dollar is a necessary prerequisite for maximizing economic 
growth and job opportunities for hardworking American taxpayers. This 
proposition is both simple and profound.
    A sound dollar requires that the Federal Reserve preserve the 
purchasing power of the dollar over time. Price stability reduces 
uncertainty and encourages entrepreneurs to make investments in new 
buildings, equipment, and software and hire more workers. And price 
stability is especially important for struggling families each time 
they buy groceries or fill their tanks with gasoline. Both inflation 
and deflation slow growth and destroy jobs. For hardworking taxpayers, 
a decline in the dollar's purchasing power is the same as a cut in pay.
    Today's hearing will explore how the Federal Reserve should achieve 
a sound dollar. In 1977, Congress gave the Fed a dual mandate for 
maintaining price stability and maximizing output and employment.
    Nobel Laureate economist Robert Mundell observed: To achieve a 
policy outcome, you must use the right policy lever. In January, the 
Fed recognized that monetary policy is the right lever to maintain the 
purchasing power of the dollar by declaring, ``The inflation rate over 
the longer run is primarily determined by monetary policy.''
    In contrast, the Fed acknowledged that monetary policy is the wrong 
lever to promote job creation by declaring ``[t]he maximum level of 
employment is largely determined by nonmonetary factors.'' During the 
1970s, the Fed tried to use monetary policy to stimulate job creation, 
and the United States ended up with both higher inflation and higher 
unemployment. Critics charge that eliminating the dual mandate means we 
don't care about jobs. They are wrong; the opposite is true. It is 
precisely because we care about growth and jobs that Congress should 
direct the Fed to preserve the purchasing power of the dollar. Monetary 
policy cannot stimulate employment except for short, temporary spurts. 
However, monetary policy can achieve price stability, which is the 
foundation for creating the greatest number of jobs that last.
    During the 1980s and 1990s, the Fed moved toward a rules-based 
policy by ignoring the employment half of its mandate to pursue price 
stability. Two long booms resulted, with very low inflation and strong 
job creation and rising real incomes.
    Then, between 2002 and 2005, the Fed deviated from this successful 
rules-based regime by keeping interest rates too low for too long. This 
contributed to the inflation of an unsustainable housing bubble that 
eventually triggered a global financial crisis. Since the height of the 
financial crisis during the fall of 2008, Washington has increasingly 
relied on the Fed to take unusual, interventionist actions such as 
tripling the size of its balance sheet under QE1 and QE2. Indeed, the 
Fed justified these extraordinary actions by invoking--for the first 
time ever in late 2008--the employment half of the Federal Reserve's 
dual mandate.
    It appears that the Fed took these actions to compensate for 
President Obama's failure to pursue pro-growth budget, tax and 
regulatory policies. Just as low borrowing costs are masking the pain 
of historically high federal budget deficits, the Fed's monetary 
experimentation allows the White House and Congress to shirk their 
responsibility for creating a competitive business climate. It is time 
to reform the Federal Reserve for the 21st century with a single 
mandate for price stability achieved through inflation-targeting. In 
January, the Fed announced an inflation target of 2% defined in terms 
of the price index for personal consumption expenditures. I applaud 
this step toward a rules-based, inflation-targeting regime, but I hope 
that 2% is the upper limit of the range.
    Accurately measuring inflation is not easy. In the last decade, we 
clearly saw that price indices of goods and services do not always 
record all of the price movements in our economy, allowing asset 
bubbles to inflate undetected. To identify incipient asset bubbles 
before they inflate to dangerous levels, the Fed should also monitor: 
(1) the prices of, and returns on, broad classes of assets including: 
equities, corporate bonds, state and local government bonds, 
agricultural real estate, commercial and industrial real estate, and 
residential real estate; (2) the price of gold; and (3) the foreign 
exchange value of the U.S. dollar. On March 8th, I introduced the Sound 
Dollar Act in the House. The Sound Dollar Act reforms the Fed in 
several important ways. The Sound Dollar Act replaces the dual mandate 
with a single mandate for long-term price stability; increases the 
Fed's accountability and openness; expands and diversifies the voting 
membership of the Federal Open Market Committee; ensures credit 
neutrality for future Fed purchases; and institutes necessary 
congressional oversight of the Consumer Financial Protection Bureau.
    These reforms are critical to ensuring that America has the world's 
strongest economy in the 21st century. Moving to a single mandate for 
price stability will help to spur investment and create millions of new 
jobs on Main Streets across America.
    I look forward to the testimony of our distinguished witnesses.
                               __________

                Prepared Statement of John B. Taylor \1\
---------------------------------------------------------------------------
    \1\ Parts of this testimony are based on Chapter 4, ``Monetary 
Rules Work and Discretion Doesn't,'' of John B. Taylor, First 
Principles: Five Key's to Restoring America's Prosperity, New York: 
W.W. Norton, 2012.
---------------------------------------------------------------------------
    Chairman Casey, Vice Chairman Brady, and other members of the 
Committee, thank you for the opportunity to testify on ``Monetary 
Policy Going Forward: Why a Sound Dollar Boosts Growth and 
Employment.'' As requested, in this written testimony I will focus on 
proposals to alter the Federal Reserve's existing dual mandate, limit 
the composition of Federal Reserve open purchases, and shift voting on 
the Federal Open Market Committee to include all District Federal 
Reserve Bank Presidents. I would be pleased to answer any other 
questions you may have.

                 CLEAR LESSONS FROM YEARS OF EXPERIENCE

    We have now had nearly 100 years of practical experience and 
detailed empirical studies of monetary decision making at the Federal 
Reserve.\2\ As a result, we have plenty of evidence that more 
systematic rules-based monetary policies work and more unpredictable 
discretionary policies do not.\3\
---------------------------------------------------------------------------
    \2\ Milton Friedman and Anna J. Schwartz, A Monetary History of the 
United States, 1867-1960, Princeton, NJ: Princeton University Press, 
1963. Allan H. Meltzer, A History of the Federal Reserve, Chicago: 
University of Chicago Press, Volume 1, 2003 and Volume 2, 2009.
    \3\ As Meltzer puts it in Volume 2 if his History: ``Discretionary 
policy failed in 1929-33, in 1965-80, and now.'' ``The lesson should be 
less discretion and more rule-like behavior.'' (p. 1255)
---------------------------------------------------------------------------
    The past 50 years are particularly instructive in this regard. From 
the mid-1960s through the 1970s, monetary policy consisted of a series 
of unpredictable discretionary go-stop interventions with increases and 
decreases in money growth and interest rates that led to frequent 
recessions, high unemployment, low economic growth, and high inflation.
    In contrast, through much of the 1980s-1990s and until recently 
monetary policy was conducted in a more predictable, rule-like manner 
with the main goal of reducing inflation and keeping it down. This was 
a period of generally lower unemployment, lower inflation, lower 
interest rates, longer expansions, and eventually stronger economic 
growth.
    More recently we have seen a move back to discretionary policies. 
In 2003-2005 the Federal Reserve deviated from the policies it followed 
in most of the 1980s and 1990s by holding interest rates too low for 
too long and thereby setting off excesses in housing and other markets 
which helped bring on the most recent boom and bust. The Fed's 
continuing departure in recent years from a rules-based monetary 
policy--with enormous discretionary purchases of mortgage-backed and 
long-term treasury securities, as well as operations to twist the 
maturity structure of the Federal debt--have increased the size and 
shifted the composition of its balance sheet by unprecedented amounts 
creating economic uncertainty and endangering its independence.
    The most fundamental lesson from this experience is that in order 
to increase economic growth, stability, and employment, monetary policy 
going forward should restore and lock-in consistent rule-like decision 
making and avoid unpredictable discretionary actions and interventions.

                            REFORM PROPOSALS

    Basic economic principles and common sense provide a starting 
point. In any organization, a clear well-specified goal usually results 
in a consistent and effective strategy for achieving that goal. Too 
many goals blur responsibility and accountability, causing decision 
makers to choose one goal some times and another goal at other times in 
an effort to chart a middle course. In the case of monetary policy, 
multiple goals enable politicians to lean on the central bank to do 
their bidding and thereby deviate from a sound money strategy. More 
than one goal can also cause the Federal Reserve to exceed the normal 
bounds of monetary policy--moving into fiscal policy or credit 
allocation policy--as it seeks the additional instruments necessary to 
achieve multiple goals.
    There is no justification for an independent agency of government 
to undertake interventions in these areas. In the spirit of the 
Constitution, they are best left to the Congress and the President to 
handle through the regular appropriations process. Central bank 
intervention is a poor substitute for sound fiscal policy, and it 
removes incentives for the Congress and the President to do their own 
jobs well: If the central bank hangs out a ``We Do Fiscal Policy'' 
shingle, or is expected to bail out fiscal policy errors, the Congress 
will try to avoid making tough decisions that might harm their 
reelection chances.
    Despite these obvious pitfalls, a multiple mandate for the Fed 
swept in during the great interventionist wave of the 1970s, when 
Congress passed and President Carter signed into law the Federal 
Reserve Reform Act of 1977. This law explicitly gave the Federal 
Reserve the goals of promoting both ``maximum employment'' and ``stable 
prices.'' This certainly was the wrong remedy for the inflationary 
boom-bust economy at the time, and monetary policy worsened for a 
while.
    It was not until Paul Volcker arrived as chairman in August 1979 
that things changed. Volcker knew that he had to focus on inflation 
like a laser beam. Of course he had to interpret the law in a way 
consistent with his change in policy. To achieve maximum employment, 
Volcker argued, he first had to reduce inflation even if that increased 
unemployment in the short run. While that approach eventually worked 
well, it also set a precedent that the dual mandate was open to 
interpretation by Fed officials. In recent years the dual mandate has 
been used by the Fed to justify massive interventions on the 
questionable grounds that these will reduce unemployment in the short 
run.
    Thus, the first step toward a more consistent policy would be to 
remove the dual mandate and bring focus to a single goal as does H.R. 
4180, The Sound Dollar Act of 2012, in which the goal is ``long-run 
price stability.'' The term ``long-run'' makes it clear that the 
mandate does not mean that the Fed should overreact to minor short-run 
ups and downs in inflation from month to month or even quarter to 
quarter. The single mandate wouldn't stop the Fed from providing 
liquidity when money markets freeze up as they did after the 9/11 
terrorist attacks, or serving as lender of last resort to banks during 
a panic, or reducing the interest rate in a recession.
    To better understand this, consider a monetary policy strategy, or 
rule, of the kind I proposed in 1992 for the Federal Reserve to follow 
in setting interest rates.\4\ In designing this rule, I assumed a 
particular goal for price stability--a target inflation rate of 2 
percent per year. But under this rule the Fed, or any other central 
bank, is supposed to change its interest rate in systematic ways in 
response to both inflation and GDP. Specifically, the rule says that 
the Fed should set the interest rate equal to 1\1/2\ times the 
inflation rate, plus \1/2\ times the percentage amount by which GDP 
differs from its long run growth path, plus 1. Thus when inflation 
rises the Fed is supposed to raise the interest rate. In addition, when 
there is a recession and GDP declines, the Fed is supposed to cut the 
interest rate; this helps mitigate the recession, reduce economic 
instability, and help generate long-term price stability. In other 
words, even though there is a single mandate underlying this strategy 
for policy, there is systematic response of the interest rate to 
inflation and other variables such as GDP or employment.
---------------------------------------------------------------------------
    \4\ ``Discretion Versus Policy Rules in Practice,'' Carnegie-
Rochester Series on Public Policy, North-Holland, 39, 1993, pp. 195-
214. Over time the rule has come to be called the Taylor rule--a kind 
of benchmark for policy.
---------------------------------------------------------------------------
    Some worry that a focus on the goal of price stability would lead 
to more unemployment. But history shows just the opposite. One reason 
the Fed kept its interest rate too low for too long in 2003-05 was the 
concern that raising the interest rate would increase unemployment, 
contrary to the dual mandate. If the single mandate had prevented the 
Fed from keeping interest rates too low for too long, then it would 
likely have avoided the boom and bust that was a factor in the 
financial crisis and which led to very high unemployment.
    A quick look at recent history shows that a single mandate would 
help to avoid the excessive discretionary interventions. In years since 
2008, the Fed has explicitly cited the dual mandate to justify its 
unusual interventions, including the bouts of ``quantitative easing'' 
from 2009 to 2011, when the Fed purchased massive amounts of mortgage-
backed securities and longer-term Treasury securities. During the 1980s 
and 1990s, Fed officials rarely referred to the dual mandate, even 
during the period in the early 1980s when unemployment rates were as 
high as today. When they did so, it was to make the point that 
achieving price stability was the surest way for monetary policy to 
keep unemployment down.
    Until the recent interventionist period, written policy statements 
and directives from the Fed did not mention the ``maximum employment'' 
part of the dual mandate in the Federal Reserve Act. There was not a 
single reference from 1979, when Paul Volcker took over as Fed chair, 
until the end of 2008, just as the Fed was about to embark on its first 
bout of quantitative easing. It increased its references to maximum 
employment in the fall of 2010 as it embarked on its second bout of 
quantitative easing.
    In my view a single mandate would reduce excessive discretionary 
interventions and encourage more rule-like policy. Nevertheless, it 
would be wise to consider supplementing such a reform with the Fed 
placing greater emphasis on the strategy or rule for setting the 
monetary policy instruments (the interest rate or the monetary 
aggregates). Until the year 2000 the Federal Reserve Act had a specific 
reporting requirement about the growth of the monetary aggregates. It 
called for the Fed to submit a report to Congress and then testify 
about its plans for money growth for the current and next calendar 
years.
    The legislation only required that the Fed report its plans for 
money growth, not that it set them in a way specified by Congress. The 
Fed had authority to choose the growth rates of the aggregates. But if 
the Fed deviated from the plans it had to explain why. If Fed 
policymakers determined that their reported objectives or plans, 
according to the words of the act, ``cannot or should not be achieved 
because of changing conditions'' they ``shall include an explanation of 
the reasons for any revisions to or deviations from such objectives and 
plans.''
    The reporting requirement was fully repealed in 2000, because the 
data on money growth had become less reliable as people found 
alternatives to money--such as credit cards or money market mutual 
funds--to make payments. The Fed therefore focused more on the interest 
rate when it made its decisions. While it was perfectly reasonable that 
money growth reporting was removed in 2000, the problem was that 
nothing comparable about interest rate reporting was put in its place.
    In order to further encourage more rule-like monetary policy, the 
Congress could reinstate the reporting and accountability requirements 
that were removed in 2000. But rather than focus only on money growth, 
it could focus directly on the systematic response of the interest 
rate. In doing so, it would not require that the Fed choose any 
particular rule for the interest rate, only that it establish some rule 
and report what the rule is. But if the Fed deviates from its chosen 
strategy, it must provide a written explanation and testify at a public 
congressional hearing. Such requirements would provide a degree of 
control by the political authorities without interfering in the day-to-
day operations of monetary policy.

                  THE FEDERAL RESERVE'S BALANCE SHEET

    The discretionary interventions of the Federal Reserve have been 
ratcheted up in such unprecedented ways in recent years that they raise 
fundamental questions about the future of monetary policy and deserve 
special consideration in monetary reform discussions. It is difficult 
to overstate the extraordinary nature of these interventions. To 
understand how these actions have already begun to change the very 
nature of monetary policy, put aside the unprecedented interventions 
leading up to and during the panic in the fall 2008 (including the 
bailouts of the creditors of Bear Stearns and AIG) and focus on the 
``Quantitative Easing: QE1 and QE2''--the large scale purchases of 
mortgage-backed securities and longer term treasuries--which occurred 
long after the emergency of the panic was over.
    In order to pay for the mortgages and other large-scale securities 
purchases, the Fed had to credit the banks with electronic deposits--
or, in other words, create ``bank money,'' or more formally reserves 
balances that the banks hold at the Fed. As a result of the hundreds of 
billions of dollars of mortgage backed and other securities, there has 
been an enormous and completely unprecedented explosion of bank money, 
as shown in the following chart.
    To provide some perspective the chart starts in the year 2000. The 
``reserve balances'' the banks hold at the Fed--this so-called bank 
money--is shown on the vertical axis in billions of dollars. A tiny 
blip appears on the chart around the September 11, 2011 terrorist 
attacks. The Fed had to increase the amount of bank money at that time 
because the attacks on the World Trade Center damaged the payments 
system and banks needed money to make payments. The Fed wisely and 
appropriately provided the money. But that amount is completely dwarfed 
by the recent explosion. 

[GRAPHIC] [TIFF OMITTED] T3996.001

    The large recent increase started in the fall of 2008 during the 
panic. Before the panic the amount was about $10 billion. By the end of 
2008 it was $800 billion. By the end of 2011 it was $1,700 billion. In 
the fall of 2008 the money was used mainly for making loans to U.S. 
banks, securities firms, and foreign central banks. As the panic 
subsided the demand for those loans diminished and the bank money would 
have retreated back to where it was before the crisis. But instead the 
Fed started the large scale purchases of mortgages and Treasury bonds, 
first under QE1 and then under QE2, which expanded the balances by much 
more.
    This large monetary overhang creates risks to the financial system 
and the economy. If it is not reduced, then the bank money will 
eventually pour out into the economy and cause a huge inflation. But if 
it is reduced too quickly, the banks may find it hard to adjust and the 
economy would take a hit. In order to unwind the programs in the 
current situation, the Fed must sell its mortgages.
    Uncertainty also abounds about the impact of the large-scale asset 
purchases (QE1 or QE2 as defined here) on markets or the economy. For 
example, in my view, the empirical evidence is weak that the mortgage 
backed securities purchases had any significant impact on mortgage 
yield spreads \5\ once one controls for prepayment and credit risk. 
Experience from the 1960s suggests that operation twists have little 
lasting effect on long term interests rates, over and above what would 
be expected from expectations of future short term yields.
---------------------------------------------------------------------------
    \5\ Johannes Stroebel and John B. Taylor, ``Estimated Impact of the 
Fed's Mortgage-Backed Securities Purchase Program,'' International 
Journal of Central Banking, forthcoming 2012.
---------------------------------------------------------------------------
    Another element of unpredictability and uncertainty concerns 
whether or not the Federal Reserve will continue to undertake more 
quantitative easing if the economy does not grow strongly enough or if 
unemployment does not come down rapidly enough. Indeed, there is 
already considerable chatter and speculation in the markets about the 
circumstances under which the Fed would start buying mortgage backed 
securities again. The fact that the Fed can, if it chooses, intervene 
without limit into any credit market--not only mortgage backed 
securities but also securities backed by automobile loans, or even 
student loans--raises more uncertainty, and of course raises questions 
about why an independent agency of government should have such power.
    To reduce such uncertainty and unpredictability--again with the aim 
of increasing economic growth and stability, some restraints on the 
composition and the size of the Federal Reserve's portfolio are in 
order. In particular, it is therefore appropriate, in my view, to limit 
asset purchases by the Fed to U.S. Treasury securities, as called for 
in H.R. 4180, The Sound Dollar Act of 2012 with exceptions as provided 
in the Act.
    With the Fed already holding large amounts of mortgage backed 
securities, it is also important for the Fed to develop a gradual and 
credible plan to reduce these holdings as part of an overall plan to 
reduce the monetary overhang and get its balance sheet back down toward 
pre-crisis levels. Had it not undertaken QE1 or QE2 it would already 
have removed the overhang--as shown by the counterfactual in the above 
chart--and there would not be considerably less uncertainty about 
monetary policy down the road.

                  THE ADVANTAGE OF REFORM LEGISLATION

    Years of experience show that a clearer rules-based framework for 
monetary policy decisions is needed in order to increase economic 
growth, stability and employment. The Federal Reserve ought to begin to 
put forth and implement such a policy framework now, whether or not 
legislative reform is enacted.
    But legislative reforms such as those in the Sound Money Act of 
2012 and would help lock in such a framework in the future.
    A single mandate of ``long-run price stability'' would encourage 
more rule-like policy and help avoid excessive discretionary 
interventions. In my view it would result in more stability and thus 
less unemployment.
    Rules to limit massive expansions of the Fed's balance sheet, 
including through requirements that open market operations be conducted 
in U.S. Treasuries, short term repurchase agreements, and reverse 
repurchase agreements, would clarify that the Fed's role does not 
include allocating credit between different sectors; it would also help 
reduce uncertainty and put monetary policy back on the road to a 
sounder more rules-based approach.
    Longer run reform should also expand voting responsibility to give 
all Federal Reserve District Bank Presidents voting rights at every 
Federal Open Market Committee meeting. Such a reform, which is also 
part of the Sound Money Act of 2012, would equalize voting power across 
the entire economy and offset any tendency for policy decisions to 
favor certain sectors or groups in the economy over others. This too, 
in my opinion, would help instill more predictable rule-like decision-
making.
                               __________
                Prepared Statement of Laurence H. Meyer

    Chairman Casey, Vice Chairman Brady, other members of the 
Committee, thank you for giving me the opportunity to comment on the 
proposed legislation. I will assess each provision in terms of what I 
see as its intent and consequences.
    Several provisions represent sensible efforts to increase the 
clarity and transparency of monetary policy. These have merit and are 
worthy of consideration.
    Several provisions, however, appear to be attempts to prevent the 
FOMC from responding to divergences from full employment, as in the 
Great Recession, and restrict the FOMC from carrying out stimulative 
policy once the federal funds rate is near zero, as it is today.
    Let's start with preliminaries. Should the government, broadly 
defined, have a goal of promoting full employment (subject to a few 
caveats)? Who should be responsible? There has been timely and, I 
believe, somewhat effective use of fiscal policy to move the economy 
back in the direction of full employment. Still, monetary policymakers 
have advantages: They can respond more quickly and are not handicapped 
by partisan maneuvering.
    But can the Fed effectively carry out stabilization policy? Are 
estimates of the minimum sustainable unemployment rate so uncertain 
that monetary policy is as likely to damage economic performance as it 
is to improve it? Does a dual mandate undermine the ability of a 
central bank to meet its price stability mandate?
    The CBO, the IMF, the Board staff, most FOMC members, generations 
of CEAs, and Macroeconomic Advisers all believe the FOMC can 
effectively promote full employment. While there is some evidence that 
central banks with an explicit inflation target do a better job 
anchoring long-term inflation expectations, the difference relative to 
the U.S. is very small, the evidence is mixed, and, in any case, the 
FOMC now has an explicit inflation objective. But the proof is in the 
pudding! Under Chairmen Volcker, Greenspan, and Bernanke, the FOMC 
effectively pushed long-run inflation expectations down from an 
unacceptable level in the 1970s and early 1980s to about 2%, and there 
has been no backtracking. In any case, the policy of keeping the funds 
rate near zero and the dramatic expansion of the Fed's portfolio do not 
risk soaring inflation. The Fed has all the tools needed to drain 
reserves and shrink the portfolio when appropriate. In any case, as 
long as it has control of interest rates, it can control inflation (not 
over the very short run, of course, but over the medium or longer 
term). This conclusion is consistent with the inflation projections of 
the CBO, the OMB, the IMF, FOMC participants, the Survey of 
Professional Forecasters, and Macroeconomic Advisers. None projects 
inflation above 2% over the next several years.
    Now let's turn to specific provisions. First, should the Congress 
change the FOMC's mandate from a dual to a single mandate? The answer 
is that it depends! If the bill is intended to move the Fed to flexible 
inflation targeting, a regime practiced by virtually every other 
central bank in the world, this is a discussion worth having, though I 
still prefer the existing dual mandate.
    Under the dual mandate, as the Chairman has emphasized and the bill 
notes, the two mandates are on an ``equal footing.'' Flexible inflation 
targeting central banks also seek to achieve full employment and price 
stability, but, in my view, operate as if they have a hierarchical 
ordering of the two objectives: inflation is the primary objective, 
full employment secondary. However, the empirical evidence shows that 
dual mandate and flexible inflation targeting central banks operate in 
essentially the same way. That is, perhaps, why some FOMC members refer 
to the Fed's regime as flexible inflation targeting and why many 
central bankers who operate in flexible inflation targeting regimes say 
there is no difference from a dual mandate framework. I prefer the 
transparency and weighting of the objectives of a dual mandate regime.
    But this provision reads like the goal is to move the FOMC to hard 
inflation targeting, a regime practiced by no central bank today. I 
strongly oppose this. Under such a regime, the central bank may only 
pursue price stability, and, therefore, must pay no attention to 
divergences from full employment, even in a case like the Great 
Recession. Perhaps Governor Mervyn King of the Bank of England sums it 
up best when he calls supporters of such a framework ``inflation 
nutters!''
    Should all presidents of Reserve Banks be voting members, that is, 
on the FOMC? The motivation of supporters, I suspect, is that currently 
there are more hawks among presidents than among Board members, so 
giving votes to all the presidents would increase the power of the 
hawks, perhaps prevent further quantitative easing, and dilute the 
power of the Chairman.
    I find it very surprising that some members of Congress, as a 
general principle, would want to decrease the power of Board members 
who have been nominated by a democratically elected president and 
confirmed by democratically elected members of the Senate, and make 
Reserve Bank presidents, appointed by unelected and unrepresentative 
boards, a majority on the FOMC. Supporters apparently believe that 
there is not enough regional influence on the FOMC's national policy 
decisions and that bankers do not have enough influence on monetary 
policy.
    While there is much ambiguity in the proposed legislation relating 
to asset purchases, any proposal restricting the Fed to holding only 
short-term government securities in its portfolio would remove the 
FOMC's ability to pursue quantitative easing, which is defined as the 
purchase of long-term securities to lower longer-term rates when 
shorter-term rates are zero. This would prevent the FOMC from providing 
additional stimulus when the funds rate is at a near-zero level and, 
indeed, promoting price stability in such circumstances. This is a 
restriction that, at least to my knowledge, no other central bank 
faces. Indeed, most central banks have greater flexibility in their 
asset purchases than the FOMC does today.
    Now for an editorial: I regret that the Fed has become so 
politicized. Some of the provisions of this bill appear to me clearly 
partisan. Please recognize that the greatest threat to the stability of 
long-term inflation expectations is an assault on the independence of 
the Fed's monetary policy decisions.
    Congress should respect the following admonition: Changes in the 
Federal Reserve Act should only be seriously considered if there is 
wide bi-partisan support.
    Thank you. I would be pleased to take your questions.

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                  Prepared Statement of William Poole

    Chairman Casey, Vice Chairman Brady, members of the Committee, I am 
pleased to be here this morning to comment on monetary policy issues 
raised by the draft Sound Dollar Act. My biographical information is 
attached to the end of my statement. For present purposes, the most 
relevant part of my career is my ten years as President and CEO of the 
Federal Reserve Bank of St. Louis.

                      MANDATE FOR PRICE STABILITY

    I applaud congressional support for a clear assignment of 
responsibility to the Federal Reserve to achieve price stability, 
defined as a low and stable rate of inflation. I encourage Congress to 
make the mandate explicit by incorporating in law the decision of the 
Federal Open Market Committee to define the goal as 2 percent 
inflation. As the FOMC emphasized in its statement on this goal, price 
stability does not preclude policy actions in furtherance of other 
goals provided that they are consistent with price stability. In fact, 
policy actions to mitigate undesired changes in employment can only be 
successful over time in an environment of price stability and market 
confidence in the Fed's pursuit of that goal.
    Unfortunately, clarity of the goal of price stability in the Sound 
Dollar Act is muddied by reference to Fed ``monitoring'' asset prices. 
In pursuit of the goal of price stability, the Fed monitors many 
different measures of economic performance, including asset prices. It 
would be unfortunate if mention of asset prices in the law created 
undue pressure on the Fed to act in some way or other as asset prices 
change. Obviously, asset price bubbles can be a serious problem. 
However, there is no settled understanding of how the central bank or 
anyone else can reliably identify an asset price bubble as it is 
occurring.
    Nor does the policy literature provide any guidance as to what the 
central bank should do if it wants to influence asset prices. The 
history of central bank and Treasury meddling in the foreign exchange 
market provides clear evidence of the harm that can be done by 
government intervention designed to influence an asset price. I urge 
you in the strongest possible terms not to include mention of asset 
prices in any legislation directing the activities of the Federal 
Reserve.
    I do not disagree that monetary policy has important effects on the 
international value of the dollar. However, requiring that the Fed 
report on the effects of its policy on exchange rates is an invitation 
to mischief. Fed policy has important impacts on a wide range of 
variables, including exchange rates. The appropriate place for the Fed 
to discuss the impact of its policies is in the semi-annual monetary 
policy hearings. There is ample opportunity for members of Congress to 
question the Fed chairman on a wide range of issues, including the 
effects of policy on exchange rates.

  ASSETS TO BE HELD BY THE FEDERAL RESERVE IN THE SYSTEM OPEN MARKET 
                             ACCOUNT (SOMA)

    I strongly support restriction of assets in the SOMA to direct 
obligations of the U.S. Treasury. Without getting into an analysis of 
all of the non-Treasury assets the Fed has purchased, consider the 
mortgage-backed securities portfolio.
    Since World War II, the U.S. Government has engaged in a variety of 
credit programs--for better or worse, I might add. These include farm 
credit, student loans, Export-Import Bank loans, Small Business 
Administration loans and so forth. Congress makes judgments about the 
amount of such credit to be offered, program objectives, eligibility, 
interest rate and other loan terms, disclosure and so forth. These 
judgments belong with Congress and not with the Federal Reserve because 
the judgments inherently have a political component to them. Congress 
authorized Fannie Mae and Freddie Mac, for example, and the process by 
which they have been brought into federal conservatorship under 
provisions of law.
    The Federal Reserve has set its own rules for buying MBSs. Other 
aspects of federal aid to the hard-hit housing sector have been matters 
for Congress and the President, but not the Fed's purchases of MBSs. 
Suppose the Fed's initial decision to purchase $1.25 trillion of MBSs 
had instead been a recommendation to Congress for legislation to do the 
same thing, except that the Treasury would administer the program and 
hold the portfolio. What would some of the questions have been as 
Congress debated the proposal?
    Given the federal budget situation, would it have been wise to 
issue $1.25 trillion of government bonds to provide the resources to 
purchase a portfolio of MBSs of like size? Should the entire $1.25 
trillion have been used for MBSs, or should some expand SBA loans, or 
help students struggling with student loans? There were many other 
possible ways of using an extra $1.25 trillion of federal credit. 
Moreover, the program was financed not by sale of Treasury securities 
but by money creation. Was that wise? Shouldn't these and other issues 
have been debated by Congress?
    Beyond that, who has benefited from the Fed program to accumulate 
and maintain a large portfolio of MBSs? A significant fraction of 
mortgages issued in recent years has been refinacings. I have 
refinanced my mortgage twice, for example. Who can refinance? Only 
those with substantial equity in their properties, despite the decline 
in house prices, and those with good credit ratings. I qualify on both 
counts. Why should the Fed be helping me and others in fortunate 
circumstances such as those I enjoy?
    I suggest that the JEC request a study from the Federal Reserve to 
report on the characteristics of the mortgages in the MBSs in the SOMA. 
I understand that the required data are readily available through 
CoreLogic. I believe that the benefits of Fed purchases of MBSs have 
gone primarily to homeowners in comfortable circumstances and to banks 
and title companies that collect fees from mortgage financing. The 
program has done little to spur homebuilding. The monetary effects of 
expanding the SOMA would have occurred in equal measure if the Fed had 
purchased Treasury securities instead of MBSs.
    The bottom line is that use of the credit resources of the U.S. 
Government should be decided by Congress and not by an appointed body 
such as the Federal Reserve. For the Fed to make these decisions 
embroils it unnecessarily in political decisions and has no monetary 
policy purpose.

                            EMERGENCY POWERS

    Section 13(3) of the Federal Reserve Act provides that the Federal 
Reserve can extend credit to a wide range of participants ``in unusual 
and exigent circumstances.'' I urge this Committee to study what this 
phrase means or ought to mean.
    I looked into this issue in 2009 because I believed at the time 
that the Fed had abused its emergency powers during the financial 
crisis. At my request, a lawyer friend of mine prepared a memo on the 
legislative history and legal meaning of ``unusual and exigent 
circumstances.'' He prefers to remain anonymous; thus, the author of 
the memo, which is attached at the end of my remarks, is listed as 
``anonymous.''
    The meaning in the law of ``unusual and exigent circumstances'' is 
nicely illustrated by the situation of a police officer at the door of 
a house who has good reason to believe that a crime is occurring in the 
house. Ordinarily, the officer must obtain a search warrant before 
entering. However, if a crime is being committed, the officer ought to 
enter and can do so legally without obtaining a search warrant.
    In the context of a financial emergency, a crisis over a weekend 
does not permit time for the Federal Reserve to appeal to Congress to 
act. However, whenever there is time for Congress to act the Fed ought 
to recommend to Congress appropriate emergency action. The Fed ought 
not to make the judgment that Congress is unable to act because of the 
politics of the situation.
    To an outside observer, what seemed to have happened is this. 
During the peak of the crisis in September 2008 and the months 
immediately following Treasury Secretary Henry Paulson and Fed Chairman 
Ben Bernanke believed that Congress would not act as required to stem 
the crisis and that the Fed needed to rely on an expansive 
interpretation of its emergency powers. I believed at the time that the 
Fed's responsibility was to go to Congress for credit programs beyond 
the weekend emergencies that led to the bailouts, wisely or not, of 
Bear Stearns and AIG.
    In an op-ed article posted on the Cato Institute web site in July 
2009, I discussed the Fed's MBS purchase program and its Commercial 
Paper Funding Facility (CPFF). The Fed announced the CPFF program on 
October 7, 2008 and made the first loans about 3 weeks later. The Fed 
announced the MBS program November 25, 2008. The first appearance of 
MBSs on the Fed's balance sheet was in mid January 2009.
    The CPFF and MBS programs should have been authorized by Congress, 
assuming they should have been authorized at all. Neither the CPFF nor 
the MBS program reflected a weekend emergency. The financial crisis 
called for quick and decisive action, but not immediate action decided 
in a matter of hours. If there was an emergency at all, it was because 
of congressional unwillingness or inability to act and not because 
Congress did not have time to act. If Congress were unable to act, 
because of its concern about the politics of the CPFF program to 
provide credit to large corporations, should a federal agency make its 
own decision on what is necessary, committing taxpayer resources 
amounting to hundreds of billions of dollars? Worse yet, while 
legislated programs would have been financed by sale of new Treasury 
securities, the Fed's programs were financed by monetary expansion--
printing money.
    The two programs were large. The CPFF reached a peak of $350 
billion in mid January 2009; the MBS program eventually amounted to 
$1.25 trillion. This enormous credit expansion was financed by printing 
money.
    The assumption that Congress could not act in a timely fashion is 
challenged by the relatively prompt enactment of the Troubled Asset 
Relief Program, proposed by Secretary Paulson in mid September 2008 and 
signed into law by President Bush about 2 weeks later. The American 
Recovery and Reinvestment Act of 2009, which President Obama signed 
into law less than 30 days from taking office, is another example of 
prompt congressional action during the financial crisis.
    The Fed should better define its lender of last resort policy, but 
the most important part of doing so is for Congress to deny the Fed the 
power to hold assets other than Treasuries in the SOMA. If the 
expansive power remains available to the Fed, in time of crisis 
politicians, the Fed and market participants will assume that the Fed 
will use the power. Without the power to hold assets other than 
Treasuries in the SOMA, the Fed could not have bailed out Bear Stearns. 
Anyone opposed to Fed bailouts ought also to favor restriction of the 
SOMA to Treasuries.

                         FOMC VOTING MEMBERSHIP

    I myself would not change this provision in the Federal Reserve 
Act. Current arrangements have worked satisfactorily and the clarity of 
ultimate political control from Washington is appropriate. It would be 
most unfortunate if reserve bank presidents came to be appointed by the 
President of the United States and confirmed by the Senate. Running 
appointments through Washington would damage the Fed's political 
independence. Although a Washington appointments process is not in the 
Sound Dollar Act, it would be all too easy for that to be the end 
result of an apparently ``minor'' amendment to the draft act during the 
legislative process.

              CONSUMER FINANCIAL PROTECTION BUREAU (CFPB)

    It is an abomination that this entity was placed off budget by 
sticking it in the Federal Reserve. The Fed should have fought the 
arrangement. Congress often emphasizes that the power of the purse and 
transparency are essential to democratic governance. Quite frankly, 
members of Congress who voted for this arrangement should be 
embarrassed. I fully endorse the proposal to establish the CFPB as an 
agency outside the Federal Reserve.
          Memorandum on ``unusual and exigent circumstances''

                               MEMORANDUM

                                 DATE: July 7, 2009
TO: William Poole
FROM: Anonymous
RE: Unusual and exigent circumstances
_______________________________________________________________________

                                 ISSUE:

    What is the meaning of the phrase ``unusual and exigent 
circumstances,'' found in the Federal Reserve Act, Section 13(3)?

                             BRIEF ANSWER:

    ``Unusual and exigent circumstances,'' as it relates to the Federal 
Reserve Act, refers to unforeseen financial circumstances that require 
immediate action or remedy, particularly when necessary to ensure the 
survival of a business entity. While there is no legislative history 
showing, what Congress intended this phrase to mean, case law 
demonstrates what ``exigent circumstances'' meant at the time in the 
context of financial conditions.

                              DISCUSSION:

I. THE LEGISLATIVE HISTORY AND APPLICATION OF THE 1932 AMENDMENT TO THE 
                    FEDERAL RESERVE ACT DO NOT PROVIDE ANY DEFINITION 
                    OF THE PHRASE ``UNUSUAL AND EXIGENT 
                    CIRCUMSTANCES.''

    The legislative history of the Federal Reserve Act amendment does 
not explain the meaning of the phrase ``unusual and exigent 
circumstances.'' The 1932 act that amended the Federal Reserve Act was 
actually a combination of two House of Representatives bills: H.R. 
9642, a proposed highway-building project aimed at putting unemployed 
Americans to work, and H.R. 12445, which proposed broader lending 
powers for the Reconstruction Finance Corporation, a government agency 
created during the depression to support economic recovery. 75 Cong. 
Rec. 4,893, 12,244 (1932). The two bills were later brought together 
under the number of the first. Id. at 15,095-96. The provision amending 
the Federal Reserve Act was not in either original bill; its first 
appearance came as part of a proposed alternative bill in the Senate. 
Id. This version included the Section 13 amendment as a replacement for 
a provision granting broad powers to the Reconstruction Finance 
Corporation to loan to corporations and individuals. Id. Because it was 
proposed late in the process as part of an alternative resolution, well 
after the filing of the committee reports, the provision was never 
discussed in committee. In addition, the amendment was a small and 
relatively minor part of the bill, and the phrase ``unusual and exigent 
circumstances'' or anything similar was never discussed in the debates. 
The bill was passed without Congress providing any guidance for the 
construction of ``unusual and exigent circumstances.''
    The history of the section's implementation is no more informative 
of the meaning of this phrase. Prior to the collapse of Bear Stearns, 
the Federal Reserve Board of Governors had not invoked Section 13(3) 
since 1936.\1\ When the Board of Governors decided to extend credit to 
JPMorgan for the purchase of Bear Stearns, it never provided an 
explanation as to what constituted unusual and exigent circumstances, 
or why they existed, but instead merely asserted that they existed.\2\ 
Minutes of the Board of Governors of the Federal Reserve System, Mar. 
14, 2008. Also, because of the long-time dormancy of Section 13(3), 
there has not been any case law addressing the construction of this 
particular clause within the Section. Neither the history of the 
statute nor the history of its usage provides any clear definition of 
what Congress meant by ``unusual and exigent circumstances.''
---------------------------------------------------------------------------
    \1\ David Fettig, Lender of More Than Last Resort, The Region, Dec. 
2002, at 18. In the four years after its inception, Section 13(3) was 
only used to make 123 small loans totaling just $1.5 million. Id. The 
later-added Section 13(b), which was enacted in 1934 and repealed in 
1958, authorized loans to private corporations without an exigent 
circumstances requirement, and was employed to a much larger extent. 
Id. at 18, 19, 43-46. Thus, the recent use of this provision is truly 
unprecedented, due to both the amount of money involved and the prior 
dormancy of this power.
    \2\ This may, in fact, be all that is required under Section 13(3). 
See infra p. 5.
---------------------------------------------------------------------------

II. DEFINITIONS OF EXIGENCY AND EXIGENT CIRCUMSTANCES IN OTHER LEGAL 
                    AUTHORITY FROM THE PERIOD PROVIDE A USEFUL 
                    DEFINITION OF THE PHRASE IN A FINANCIAL CONTEXT AS 
                    APPLIED IN SECTION 13(3).

    Black's Law Dictionary (3d ed.), published in 1933, did not have a 
definition of ``unusual and exigent circumstances.'' It did, however, 
have a definition of exigency: ``Demand, want, need, imperativeness; 
emergency, something arising suddenly out of the current of events; any 
event or occasional combination of circumstances, calling for immediate 
action or remedy; a a pressing necessity; a sudden and unexpected 
happening or an unforeseen occurrence or condition.'' Black's cited a 
District Court case which further defined exigency, equating it to 
emergency, and describing it as ``something which arises suddenly out 
of the currents of events'' and ``any event, or occasional combination 
of circumstances, which calls for immediate action or remedy.'' United 
States v. Atlantic Coast Line Co., 224 F. 160, 166 (E.D.N.C. 1915). In 
that case, a law prohibiting railroad telegraph operators from working 
for more than nine continuous hours, except in case of emergency, was 
held to permit an operator to remain at the switchboard longer than 
nine hours when his relief was unexpectedly and irretrievably deposed, 
with no way to bring in a substitute. Id. While these provide a useful 
definition of exigency at the time the 1932 amendment was enacted, it 
does not define the phrase in the context of the Federal Reserve Act.
    However, there is case law addressing a similarly worded section of 
the United States Code that provides some insight. Under 41 U.S.C. 5, 
the Government is required to advertise for contract proposals ``for a 
sufficient time'' before contracting for goods or services, except for 
under certain circumstances, including ``when the public exigencies 
require the immediate delivery of the articles or performance of the 
service.'' \3\ In Good Roads Machinery Co. of New England v. United 
States, an action to recover for equipment sold under a contract with 
the United States, the Government argued that its own contract with the 
plaintiff was invalid because there was no bidding period for the 
contract. 19 F.Supp. 652, 653 (D.Mass. 1937). Referencing the statute, 
the Court defined ``public exigency'' as ``a perplexing contingency or 
complication of circumstances; or a sudden or unexpected occasion for 
action'' necessitating immediate delivery of the goods or services. Id. 
at 654. The Court held that the Great Depression, and the related need 
to put people to work, constituted a public exigency, as evidenced in 
part by the fact that the Government had at the time ``recognized that 
a sudden and unexpected occasion for action had arisen, and were 
directing their best efforts to solving the complicated and perplexing 
problem of unemployment.'' Id. Under this section of the U.S. Code, 
financial conditions arising out of an economic crisis are sufficient 
to be considered an exigency.
---------------------------------------------------------------------------
    \3\ The term ``public exigencies'' is somewhat dated--the language 
of this statute dates back to 1861. Act of Mar. 2, 1861, ch. 84, Sec. 
20, 12 Stat. 220. However, the definition used by the Court parallels 
exigency and exigent circumstances in general.
---------------------------------------------------------------------------
    Another case provides a direct example of a legal determination of 
exigent circumstances based on the financial health of an individual 
corporation. In Carson v. Allegany Window Glass Co., a minority 
stockholder sought to have the defendant corporation placed in 
receivership due to self-dealing by the president-majority stockholder 
of the corporation. 189 F. 791 (D.Del. 1911). While there was no 
statute authorizing the appointment of a receiver when the corporation 
in question is solvent, the Court recognized that ``[s]pecial and 
exigent circumstances \4\ may, in the absence of a statute, warrant and 
justify a receivership of a corporation, although solvent . . . '' Id. 
at 796. The Court did not find that a simple shareholder dispute over 
how the current board or president conducted business constituted 
special and exigent circumstances, and stated that such a finding would 
require facts clearly disclosing ``such fraudulent, willful or reckless 
mismanagement . . . as to produce a conviction that further control of 
the corporation by the same board would result in the destruction of 
its business and insolvency, or cause great and unnecessary loss to its 
creditors or stockholders.'' Id. The fraud and misconduct, however, are 
not the exigent circumstance, but the cause of the exigent 
circumstance; what the Court stressed as being the trigger for exigency 
is ``the probability of serious and substantial disaster or ruin to the 
corporate enterprise.'' Id. at 797. Therefore, in the context of 
determining whether to transfer control of a corporation, the Court 
looked to whether the conditions under those currently in control 
created a need for immediate action to protect the corporation. By 
analogy, in the context of determining whether to grant an emergency 
loan under Section 13(3), it follows that ``unusual and exigent 
circumstances'' would exist if extraordinary and unforeseen financial 
conditions left a corporation with a lack of funds that necessitated 
immediate action.\5\
---------------------------------------------------------------------------
    \4\ It is noteworthy that the language used in this 1911 case is 
nearly identical to the language used in the 1932 amendment.
    \5\ It is worth noting that Section 11(r) of the Federal Reserve 
Act, added in 2002, permits the Board to come to utilize its 13(3) 
powers in situations where there are less than five members present. 12 
U.S.C. 248(r). This provision was part of a larger bill aimed at 
providing insurance in the event of terrorist attacks. While the 
legislative history does not address the provision amending the Federal 
Reserve Act specifically, one can assume the reason for it was so that 
the Board could take immediate action in response to a financial crisis 
so exigent that even a delay to contact other Board members by phone 
``or other electronic means'' would be too long (as reflected in 
11(r)(1)(A)(ii)(IV)). As it was geared towards emergency situations, 
the requirements under which the Board may utilize its 13(3) powers 
with less than five members present are stringent: the present members 
(there must be at least two) must unanimously determine that exigent 
circumstances existed, that the borrower is unable to secure credit 
through other means, that action is necessary to prevent ``serious harm 
to the economy or the stability'' of the U.S. financial system, that 
they have been unable to contact the other board members by any means 
available, and that waiting any further to do so would be impossible.
---------------------------------------------------------------------------

                               CONCLUSION

    The phrase ``unusual and exigent circumstances'' in Section 13(3) 
of the Federal Reserve Act is not clearly defined within the act. The 
legal definition of exigency in general is any situation or combination 
of circumstances that creates an immediate and pressing need for 
action. Drawing analogies from other cases in the financial field 
addressing exigent circumstances, it appears that Section 13(3) refers 
to situations in which loans are necessary to prevent the catastrophic 
failure of a corporation, and that a national economic crisis can give 
rise to exigent circumstances.
                 William Poole Biographical Information
    William Poole is Senior Fellow at the Cato Institute, Distinguished 
Scholar in Residence at the University of Delaware, Senior Advisor to 
Merk Investments and a Special Advisor to Market News International.
    Poole retired as President and CEO of the Federal Reserve Bank of 
St. Louis in March 2008. In that position, which he held from March 
1998, he served on the Federal Reserve's main monetary policy body, the 
Federal Open Market Committee. During his ten years at the St. Louis 
Fed, he presented over 150 speeches on a wide variety of economic and 
finance topics.
    Before joining the St. Louis Fed, Poole was Herbert H. Goldberger 
Professor of Economics at Brown University. He served on the Brown 
faculty from 1974 to 1998 and the faculty of The Johns Hopkins 
University from 1963 to 1969. Between these two university positions, 
he was senior economist at the Board of Governors of the Federal 
Reserve System in Washington. He was a member of the Council of 
Economic Advisers in the first Reagan administration, from 1982 to 
1985.
    Poole received his AB degree from Swarthmore College in 1959, and 
MBA and Ph.D. degrees from the University of Chicago in 1963 and 1966, 
respectively. Swarthmore honored him with the Doctor of Laws degree in 
1989. He was inducted into The Johns Hopkins Society of Scholars in 
2005 and presented with the Adam Smith Award by the National 
Association for Business Economics in 2006. In 2007, the Global 
Interdependence Center presented him its Frederick Heldring Award.
    Poole has engaged in a wide range of professional activities, 
including publishing numerous papers in professional journals. He has 
published two books, Money and the Economy: A Monetarist View, in 1978, 
and Principles of Economics, in 1991. In 1980-81, he was a visiting 
economist at the Reserve Bank of Australia and in 1991, Bank Mees and 
Hope Visiting Professor of Economics at Erasmus University in 
Rotterdam. At various times, he served on advisory boards of the 
Federal Reserve Banks of Boston and New York, and the Congressional 
Budget Office.
    Poole appears frequently on the speaking circuit and is well known 
for his commentary on current economic and financial developments.
    Poole was born and raised in Wilmington, Delaware. He has four 
sons.
                               __________
        Prepared Statement of Representative Elijah E. Cummings

    Chairman Casey could not be here today and I am pleased to stand in 
for him this afternoon. I thank Vice-Chairman Brady for calling this 
hearing to examine our nation's monetary policy and its effect on our 
economy.
    I also thank our esteemed witnesses for appearing before us today 
and lending their expertise to this important matter.
    The Federal Reserve System was created in 1913 to ``provide the 
nation with a safer, more flexible, and more stable monetary and 
financial system.''
     In 1977, Congress enacted legislation that spelled out in greater 
detail the Fed's monetary policy objectives. Collectively known as the 
Fed's dual mandate, these objectives are to ``promote effectively the 
goals of maximum employment, stable prices, and moderate long-term 
interest rates.''
    I understand that today's hearing is being called to examine 
legislation proposed by the Vice-Chairman that would limit the Fed's 
mandate to the single objective of ensuring price stability, and that 
would make other changes to the central bank's decision-making 
authority and structure.
    While I certainly share the Vice-Chairman's goal of ensuring price 
stability and preventing inflation, I believe that the current system 
is working effectively, and is also essential to enabling the Fed to 
adjust monetary policy quickly in times of crisis.
    While it is true that in the past few years, the Fed has 
implemented some extraordinary monetary policies, these actions were 
necessitated by extraordinary circumstances, and by most measures, have 
helped stabilize our economy and prevent a complete collapse.
    Certainly, our recovery from the 2008 financial collapse has been 
long and painful, and at times, filled with false promise.
    For example, while it appeared early last year that the economy was 
turning a corner, we stumbled again due to factors like the earthquake 
in Japan, the rise in energy prices, the continuing economic turmoil in 
Europe, and the still struggling housing market.
    However, since the end of 2011--shortly after the Fed launched 
``Operation Twist''--the economy has shown signs of a sustained 
recovery.
    Last week, new claims for unemployment benefits reached a four-year 
low. Over the past six months, the U.S. has seen the highest consistent 
numbers of jobs created since 2006, and consumer confidence is at its 
highest level since 2004, according to a March 22 Bloomberg report.
    Moreover, the fears announced by critics of the Fed's policies have 
simply not been proven correct. The monetary easing actions have had 
such a minimal impact on inflation that Reuters recently posed the 
question: where is the inflation?
    Brookings Institution economist, Barry Bosworth, stated recently, 
``There's been no collapse of the American dollar . . . the dollar was 
declining up to the financial crisis and then shot up in value and 
we're still not back to where we were before the financial crisis 
started.''
    Finally, I note that while some have tried to link the spike in oil 
prices and other commodities to the Fed's monetary easing policies, the 
Congressional Research Service examined this issue and rejected any 
causal relationship.
    Most experts have pointed to traditional factors such as supply and 
demand, as well as the increasing role of speculators in driving up 
prices at the pump.
    The one area of our economy that continues to struggle is 
employment, and this is the area that the Vice-Chairman's legislation 
would require the Fed to ignore. I could not disagree more.
    I commend Chairman Bernanke and the other Federal Reserve governors 
for continuing to pursue the objective of maximum employment, while 
drawing Congress's attention to actions that it could take to support 
higher employment.
    Unfortunately, Congress has failed to implement these actions--a 
failure that I find deeply troubling given that there are millions of 
unemployed Americans who could benefit from the Congressional actions 
recommended by the Fed.
    Again, I thank the witnesses for joining us today, and I yield 
back.