In an appearance on CNBC Wednesday morning, James Grant, publisher of Grant’s Interest Rate Observer, repeated familiar arguments against the ongoing accommodative policy pursued by the Federal Open Market Committee, which Grant labeled, as do I, QE-n. In the setup to the interview, the remarks of Charles Evans, president of the Federal Reserve Bank of Chicago, stating that the Fed should continue to buy securities until it saw the needed response in the unemployment rate and that the Fed would simultaneously watch for any evidence of an untoward rise in inflation were replayed. Evans presented this as a straightforward adherence to the dual mandate of fostering economic growth without inflation.
Grant’s complaint is that these actions fail to meet what he calls the “common sense mandate.” He argues that the Fed was created to supply liquidity when it was needed seasonally or cyclically, but the Fed is not empowered to manage the economy according to its own economic model. He asserted, without elaborating, that the experience of the 1930s that Fed Chairman Ben Bernanke has studied so extensively is irrelevant to the current circumstance. Grant called for a restoration of capitalism rather than having the economy managed by government authorities.
Another panelist, James Tisch, CEO of Loews, observed that the Fed is under enormous political pressure to do something, and its actions have inflated prices in certain areas, such as housing and equities.
What these gentlemen have missed, and what has been missing from the debate on Fed policy is the fact that the so-called dual mandate has expanded over a span of decades to encompass perhaps as many as eight or more mandates, in a classic case of mission creep.
If one adds the mandates to promote the re-election of the president and reappointment of the Fed chairman, the total of mandates is up to four. If one adds support for the banking, housing and securities industries, the total grows to seven, and it is easy to see that this number is likely to grow after the election, perhaps to encompass the commercial real estate industry, which would bring the total to eight.
Moreover, Fed policy seems to have been influenced over the last 50 years or so by the philosophy of Hyman Minsky, an economics professor who served as a consultant to the Commission on Money and Credit in 1957. The core of Minsky’s philosophy was that the government can and should intervene to improve the performance of markets.
Perhaps the scope of the debate needs to expand to match the reach of the Fed’s growing mandate.
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