WASHINGTON (Reuters) - A Republican leader in Congress was poised on Tuesday to introduce legislation to strip the Federal Reserve of its mandate to ensure full employment, the latest bid in Washington to clip the central bank’s powers.
Representative Kevin Brady told a hearing of Congress’s Joint Economic Committee that restricting the Fed’s mandate to price stability would not mean the issue of employment would be ignored.
Brady said his legislation would also require the Federal Reserve to publicly announce an inflation target.
A move to restrict the Fed’s mandate to inflation has gained traction with Republicans over the last year. Senator Bob Corker and Representative Mike Pence last year had said they supported ending the Fed’s dual mandate of price stability and maximum employment, which it has had for more than 30 years.
The U.S. central bank has faced a barrage of criticism from politicians as the U.S. economic recovery remains fragile, and the national unemployment rate remains stuck above 9 percent.
“While some may mistakenly claim that a single mandate means maximizing employment is unimportant, history proves the best way for the Federal Reserve to maximize employment is to focus on achieving long-term price stability,” Brady said.
“Monetary policy affects prices. In contrast, budget, tax and regulatory policies affect real output and jobs,” said Brady, who is vice chairman of the committee, which is made up of equal membership from both chambers of Congress and both parties.
Testifying at the hearing, Federal Reserve Chairman Ben Bernanke did not resist the idea, although he said the dual mandate “has worked pretty well, on average, over time.”
“I would also point out that central banks that have inflation as their primary, or technically only, mandate do pay attention to economic conditions if for no other reason than that affects inflation expectations,” he said.
“So, I think our dual mandate is workable, although I agree that in the long-run the only thing the Fed can control is inflation, and in the long-run low inflation is the best thing we can do for growth,” he added.
Republicans, who are more skeptical of the Federal Reserve’s authority, control the House of Representatives and could welcome Brady’s legislation. Democrats still control the Senate and may be colder to the prospects of a bill limiting the opportunities to address the jobs problem.
Republican Senators Jim DeMint and Mike Lee, along with Representative Mick Mulvaney, also said at the hearing that the Fed should have only the single mandate.
Bernanke gave a vigorous defense of the Fed’s track record on jobs, saying the rise in unemployment, now near a quarter-century high at 9.1 percent, was caused by insufficient financial oversight that led to the credit crisis, not by Fed policy.
Additionally, he said that the Fed, through its ultra-loose monetary policy and its special operations, has acted to ensure financial stability, not to rescue Wall Street.
“We are not bailing anyone out,” he said.
Brady also suggested that the central bank become more involved in currency exchange rates and that the responsibility should be moved from the Treasury department to the Federal Reserve.
“By controlling the money supply, the Federal Reserve directly affects the foreign exchange value of the U.S. dollar. Moreover, swings in exchange rates influence domestic prices,” he said.
“The Federal Reserve would retain full operational independence from both Congress and the president to achieve that inflation target,” he said.
Additional reporting by Stella Dawson, Editing by Leslie Adler