Paul Ryan Would Have Fed Forget Jobs and Focus on Inflation

Romney's running mate wants the employment-boosting half eliminated from Fed's dual mandate.

Romney, Ryan

Paul Ryan gets a lot of attention for his budget proposals, but his monetary policy ideas are no less consequential. Like several of his Republican compatriots on Capitol Hill, the new running mate to Republican presidential candidate Mitt Romney wants the Federal Reserve to focus solely on inflation, abandoning its mandate to bolster employment. And though the job market is persistently weak, it could be a winning policy for Romney to adopt onto his platform.

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The equation is simple: Ryan's past fiscal proposals, which have included steep cuts to popular entitlement programs like Medicare, will be a key target for Democrats as November approaches. That means less time for debating Ryan's controversial positions on the nation's central bank. Meanwhile, Ryan's position on the Fed could further energize some Republican voters.

"The position he took on the Fed resonates with the conservative base, and that's certainly grist for their mill. I'm not sure it's going to be a top political target for Democrats. If Democrats don't make an issue of it, it simply consolidates and fires up the base of the GOP," says Steven Schier, professor of political science at Carleton College in Northfield, Minn.

Currently, the Fed operates under what is called the dual mandate, with simultaneous goals of keeping prices stable and fostering maximum employment. In 2008, Ryan sponsored a bill to repeal that dual mandate, reducing the Fed's responsibility to simply keeping prices stable.

Proponents of this point of view argue that accommodative monetary policy, exemplified in the Fed's two rounds of quantitative easing, could lead to excessive inflation and a weaker dollar.

Ryan has maintained the pressure on the Federal Reserve. At a February hearing, Ryan criticized the Fed's tools for promoting jobs, telling Federal Reserve Chairman Ben Bernanke that such tactics "are limited, imprecise, and can have highly undesirable unintended consequences."

He isn't alone; several of his conservative congressional colleagues are in the single-mandate camp. Texas Republican Rep. Kevin Brady introduced a bill earlier this year that would also have eliminated the dual mandate.

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It's not as extreme a position as Texas Rep. Ron Paul took in his run for the Republican nomination—Paul has advocated ending the Fed—but it could give far-right conservatives more enthusiasm for Romney.

"GOP activists might be aware of it, and it might produce more volunteers, more voters, more contributions. It's all part of the Ryan picture," says Schier.

While many partisans have a firm opinion on the Fed's dual goals, piecing out exactly how the central bank's mandate has affected the economy during the downturn is next to impossible.

Having a dual mandate means that the Fed pushes harder to speed job market recovery, says Nigel Gault, chief U.S. economist at forecasting firm IHS Global Insight.

In a situation where unemployment is high, "that means that the Fed effectively becomes more activist and tries to get the employment rate back towards full employment more quickly than if it just let the natural forces of recovery, which I think in this case are pretty weak, operate," he says.

He adds that having a central bank fighting unemployment could arguably bolster longer-term employment, as people who are jobless for longer are increasingly likely to remain jobless.

Then again, there is still the spectre of inflation. Opponents of the dual mandate have long feared that accommodative policies would lead to massive price spikes.

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"It doesn't mean it will never happen, but so far those fears haven't come to pass," says Gault.

Those fears are likely to be raised again in coming weeks, as speculation grows that the Federal Reserve will potentially announce a third round of quantitative easing at its September meeting.

While conservatives argue that the Fed should keep its eye on inflation, some question who, then, would mind employment under a single mandate. With deep partisan divides on Capitol Hill, says Joel Naroff, president of Pennsylvania-based Naroff Economic Advisors, there may be no one left to take action on economic growth.