By Neil Irwin
Washington Post Staff Writer
Tuesday, November 16, 2010; 8:25 PM
Two influential Republican lawmakers called Tuesday for a fundamental remaking of the Federal Reserve's mission, arguing that the central bank should stop trying to reduce unemployment and instead focus solely on keeping inflation low.
The proposal by Sen. Bob Corker (Tenn.) and Rep. Mike Pence (Ind.) would end the three-decade-old "dual mandate" of the Fed, its legal charge from Congress to simultaneously aim for maximum employment and price stability.
They argued that the law creates muddled policy, as Fed officials have to juggle two different goals. They said that the Fed is better suited to fighting inflation and that other parts of the government and the private sector should handle job creation.
"Providing our central bank with a clear and explicit focus on keeping inflation low will serve America better than the broader mandate approach we have today," Corker said in a statement.
The proposal, which Pence introduced as legislation this week, is the latest surprising development in the wake of the Fed's decision two weeks ago to buy $600 billion in Treasury bonds in unconventional effort to boost growth.
Fed Chairman Ben S. Bernanke has called the bond purchase a logical move given that the central bank is falling short on both parts of its mandate, with unemployment stubbornly high and price growth well below an unofficial target set by Fed policymakers. But the program has drawn criticism from economists and elected officials who fear it could spark inflation or a steep drop in the dollar.
The changes proposed by Corker and Pence would align the Fed's legal marching orders with those followed by most other foreign central banks. For example, the European Central Bank is charged with maintaining inflation just under 2 percent but has no formal mandate to prevent joblessness.
A Fed spokeswoman said Tuesday that the central bank is not seeking a change in its mandate, and that the current policy is "appropriate." However, some presidents of regional Fed banks are more open to the idea that the central bank would be better off with a narrower mission, like its counterparts abroad.
With the unemployment rate at 9.6 percent, such a change would be controversial and unlikely to be seriously considered by the Senate, which will remain controlled by Democrats when the new Congress convenes in January.
House Financial Services Chairman Barney Frank (D-Mass.) said Monday that revamping the Fed's mission would be a "very dumb fight" for Republicans to pursue. "The notion that the Fed should be indifferent to unemployment is a terrible idea, damaging to the economy," he said, according to Bloomberg News.
Corker's new position comes after a closed-door meeting with Bernanke on Monday, during which the Fed chairman briefed the senator on the bond-purchase program.
"At this meeting, Corker probed Chairman Bernanke on recent actions by the Fed," said the statement from Corker. "As a result of lengthy research and discussion, Corker believes now is the time to direct the mandate of the Fed to focus only on price stability."
The dual mandate dates to the 1978 Humphrey-Hawkins Full Employment Act, and can cause confusion for the central bank at times. Although stable prices can boost the job market's health in the long run, the two aims can conflict in the short run.
For example, in the first half of 2008, inflation was very high as energy and other prices skyrocketed. Yet the labor market was getting worse, with layoffs mounting. Bernanke and his colleagues cut interest rates to try to address the deteriorating economy, while the European Central Bank, focused as it is solely on inflation, raised interest rates to contain prices.