The balance between the Federal Reserve’s accountability and independence means the Fed should be answerable to Congress and not the President.
That was the message from two financial market analysts as they testified in front of the House of Representatives.
“What should be obvious but what is often ignored is that the Fed is a creature of Congress,” said Dr. Norbert Michele, Director of the Center for Data Analysis at the Heritage Foundation, a conservative think tank. “Any operational independence that the Fed enjoys should definitely apply the Fed’s independence from the executive branch.”
“From James Madison [the fourth president of the United States], who wanted to protect the new United States from a ‘rage for paper money’ as he said, to now, money has always been an inherently political issue,” said Alex Pollock, a Distinguished Senior Fellow at the R Street Institute, a free market think tank.
“Accountability and the power to define and manage money is granted by the Constitution to Congress,” said Pollock, “There can be no doubt that the Federal Reserve is a creature of and accountable to the Congress, just as Norbert said, and the Congress of course represent the people, for whom the nature and potential abuse of their money is always a fundamental issue. The primary central bank independence problem in my view is independence from the executive branch. The executive naturally wants its programs – and especially its wars – financed by the central bank.”
Both were testifying in front of the House Financial Services Committee sub-committee on Monetary Policy and Trade held late last week at a hearing entitled “A Further Examination of Federal Reserve Reform Proposals.”
Pollock clearly believes that the Fed currently has too much independence: “Under the Fed’s current fiat money regime, we have experienced the great inflation of the 1970s, the financial crises of the 1980s, the bubbles and crises of the 1990s and 2000s, and the radical asset price inflation [the increase in the stock market], the outcome of which is as yet unknown.”
Pollock further noted that while Congress mandated that the Fed follow a “stable price policy” it was the Fed that defined stable as 2% inflation.
One proposal which both Pollock and Michele supported was giving Congress the power to appropriate money for the Fed’s regulatory and supervisory functions.
This is one of the most controversial proposals, with many Democrats arguing that it would politicize the Fed’s regulatory role even more.
“The power of the purse is the fundamental power of Congress. In this way, I think the proposal takes us exactly to what the Constitutional design is. That is to say that Congress is responsible for the definition of money and the management of money in which the Federal Reserve is its helper. The notion that the Fed or any body should be independent of the Congress is in my opinion a grave and very costly mistake.”
Article 1 of the US Constitution gives Congress – and Congress alone – the power to allocate funds for all federal governmental functions. For instance, while the President proposes a budget each year, it is Congress that allocates the money. That was why both the heads of the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) both testified in front of Congress earlier in 2017 in support of budget proposals for each agency. Both heads were in effect asking for Congress to approve the money each believed each agency needed.
The President still retains the power to veto anything the Congress passes but cannot allocate any money on his own. This dynamic is currently being played out with the border wall, which President Trump insists the nation needs, but which he needs Congress to allocate funds to build. In much the same way, Pollock argues that the Fed should have the same restrictions. Just as every other federal agency must ask for money which Congress allocates, so too should the Federal Reserve.