Federal Reserve Chairman Ben Bernanke today sent a clear message to Congress: "Do more." And some Republicans on the committee he was addressing responded by proposing that the Fed do less.
Today at a hearing of the Joint Economic Committee, Bernanke acknowledged that a recovery "has been less robust than we had hoped," but he also noted that monetary policy "is not a panacea for the problems currently faced by the U.S. economy." As he has done in the past, he emphasized the necessity for congressional action to create lasting economic stability. Perhaps most notably, he said that the so-called supercommittee's task of achieving $1.5 trillion in deficit reductions over the next decade—itself a lofty goal—will not be enough to achieve fiscal sustainability. In addition, Bernanke urged policymakers to get the nation's longer-term fiscal situation under control, hold off on deep spending cuts in the immediate future, and improve the budget process.
That is a formidable list of tasks, particularly for a deadlocked Congress. But then, the Fed by law must work to achieve two herculean tasks: fostering price stability and maximum employment, or the "dual mandate." That dual mandate has been in place since 1978, but Republicans, from lawmakers to presidential candidates, have recently been arguing for the Fed to go back to its single mandate of price stability. In his opening statement, Joint Economic Committee Vice Chairman Kevin Brady announced his intention to introduce legislation that reduces the mandate. Sen. Jim DeMint and Rep. Mick Mulvaney, both Republicans from South Carolina, likewise questioned the effectiveness of the dual mandate.
Perhaps the most common criticism of the dual mandate is that the goals of price stability and maximal employment are at cross purposes. As Brady pointed out today, the central banks of nations in the European Monetary Union, as well as Australia and Canada, either have price stability as their sole or primary goal. Adolfo Laurenti, deputy chief economist at Mesirow Financial, says that the rationale for this arrangement is all about what a central bank is good at; monetary policy is directly connected to inflation levels, but employment is trickier. "There are many other things that go into unemployment rate, so that would be a spurious target for a central bank, because a central bank can control inflation directly, [but] can control the unemployment rate only very indirectly," says Laurenti.
Mark Lamkin, CEO and chief investment strategist of Lamkin Wealth Management, is a proponent of the dual mandate, and he adds that now, in the midst of a stalled recovery and a deadlocked Congress, is a particularly bad time for lawmakers to consider reducing the Fed's mandate. "I don't think you take that power away from the Fed, because if you do, you just have Congress and the Senate and the presidency. ... With the way they've been, there's no way in hell they're going to promote full employment," says Lamkin.
Of course, the Fed itself has had limited results on the employment front, as Bernanke acknowledged today: "We are much further from full employment than we are price stability." And it may be running out of ammunition to spend on either of those goals, a point that Lamkin believes Bernanke was trying to drive home to committee members. "They [the Fed] were saying, 'We've done our part to keep this thing from going to a deep recession. ... Before we use up all our arrows, you're all going to have to come to the table and give us some bipartisanship on the supercommittee and maybe some regulatory surety, restore some confidence there,'" says Lamkin.
The disagreement over the dual mandate is, of course, just one small dispute that illustrates larger partisan differences over the Fed's role—and the larger governmental role—in promoting economic recovery. Democrats on the committee were more likely to defend the idea of government as a force for promoting growth. Committee Chair Sen. Bob Casey, for example, was adamant that "we need to use all available tools to support our economy in the short term." Democratic Sen. Bernie Sanders pushed for more Fed intervention, pressing Bernanke on the banking industry. "Why shouldn't we break them up?" he asked about the nation's largest financial institutions. Bernanke responded that it would be best to institute incentives to reduce those firms' risky behaviors, as well as size.
Though lawmakers clearly have established firm and largely partisan positions on both sides of this line, they were united today in their desire for Bernanke to predict the future. As always, the Fed chairman was measured in his responses. He predicted that Operation Twist would provide "moderate support" to the economy, though it is not expected to "radically change the picture." And as to the now-perennial question of whether there would be a third round of quantitative easing, Bernanke responded that the Fed never takes an option off the table, but added, "We have no immediate plans to do anything like that."