Should the Fed be more open in its money policy?
Lawrence K. Roos called himself a ``disillusioned old codger''; but Mr. Roos, retired president of the Federal Reserve Bank of St. Louis, doesn't sound like it. He speaks more like an enthusiastic reformer. ``Because we live in an open and free society -- in the political sense, monetary policy goals must be agreed upon by, and known to, the public,'' he told a recent conference held by the Cato Institute, a free-market public-policy research institute.
``And the method chosen by policymakers to achieve those goals must be clearly understood by the public. Policy actions must be easily observable, well explained, and, of course, consistent with the goals sought. And finally, it is essential that policymakers be held accountable for the achievement of their announced goals.''
That may seem reasonable. But the fact is that the Federal Reserve System, the nation's central bank, is one of the most secretive of federal institutions. Its goals are not clear to outsiders -- or, for that matter, to many insiders, probably.
Most economists would agree nowadays that the Fed's monetary policy is an extremely important -- if not the most important -- influence on economic trends in the United States. Tight money can prompt a recession. Loose money can encourage a boom. The level of inflation generally reflects the amount of money the Fed pumps into the economy, though only after a lag of two years or so.
In fact, it is often said that the chairman of the Fed (Paul A. Volcker at the moment) is the nation's second most powerful individual, after the president himself. Since the US has the most powerful economy in the world, accounting for about 20 percent of global output, some economists regard Mr. Volcker as No. 1 in world economic power.
What bothers Mr. Roos about all this is that not only does the Fed ``love to be secretive and mysterious,'' but it does not set any ``clear, achievable, long-range goals.''
Roos was joined to a degree in his complaint by an actual Fed policymaker, Robert P. Black, president of the Federal Reserve Bank of Richmond, Va.
``It would seem to make sense,'' he said, ``to narrow the Fed's mandate in order to reduce its need to rely heavily on discretion in conducting policy. Such a narrowing would enable the Fed to develop a cohesive strategy with clear and feasible objectives and, in my opinion, would very likely improve the quality of monetary policy over the long run.''
One of the Fed's problems is that is has been assigned by Congress what might be called a ``mission impossible.'' The Federal Reserve Act, as amended by the Humphrey-Hawkins Act of 1978, states that Federal Reserve policy should promote maximum employment, stable prices, and moderate interest rates. These goals should be pursued with due attention to production, investment, real income, productivity, international trade, and balance-of-payments equilibrium, as well as employment and prices.
Mr. Black notes, however, that Congress gives the Fed no priorities for these various objectives. Nor does it specify any time horizon over which the Fed's success is to be evaluated.
Roos termed these goals a ``wish list,'' saying that ``asking monetary policymakers to do all this is sheer nonsense . . . a total lack of understanding as to what the Federal Reserve is capable of doing.''
Probably Congress itself could not agree on priorities, since such matters as unemployment and interest-rate levels are highly sensitive politically. So it dumped this hot potato on the Fed, saying, in effect, ``Make the economy run perfectly.''
Black doesn't like bouncing this hot potato around. ``It should be obvious to anyone that a mandate which instructs the Fed, in essence, to pursue all desirable economic objectives is no basis for an effective strategy for money policy. Such a broad mandate merely transfers all of the hard strategic choices regarding priorities, time frames, and what is and what is not feasible to the Fed, which is not in a position to make them, precisely because it has no clear mandate.''
He concluded: ``Clearly, it puts the Fed in a Catch-22 position.''
Mr. Black would like to see Congress instruct the Fed to put its top priority on price stability. He regards this as a feasible objective for Fed policy.
``The close longer-run correlation between the growth of monetary aggregates and the price level is one of the most firmly established empirical relationships in economics,'' he noted.
There is much less agreement, he added, on the Fed's ability to influence such variables as employment and production ``in a systematic and socially beneficial way.''
Frank Morris, president of the Federal Reserve branch in Boston, counters that Black's proposition for an inflation-only goal is not practical. Because fiscal policy (federal taxation and spending levels) has proved to be inflexible, monetary policy must also consider employment objectives. ``Government can't take the position it doesn't have any unemployment objective,'' he contended in an interview in Boston.
Nonetheless, having been given a many-sided policy problem, the Fed has had difficulty itself setting priorities and goals.
Mr. Roos recalled: ``Never once in my participation in meetings of the FOMC [Federal Open Market Committee, the 12-person policymaking body of the Fed] do I recall any discussion of long-range goals of economic growth or desired price levels. It was like trying to construct a house without agreeing upon an architectural design.''
One difficulty is that FOMC members do not always agree on priorities when the goals are not compatible with one another. ``There were usually as many goals as there were chairs around the table,'' Roos said.
One consequence, the former monetary policymaker says, has been the setting of policy for only the shortest time spans. ``The net result of such a disorderly pursuit of transitory goals is likely to be precisely what we have experienced over the past decade -- namely, highly variable money growth, volatile financial markets, and real growth that has repeatedly swung from boom to bust.''
Monetary policymakers ``want to do the right thing,'' Roos says. But they aren't doing so and won't until given ``clearly defined and achievable goals.''