Zero Interest Rates and Uncharted Territory

Federal Reserve Chair Janet Yellen (photo credit: International Monetary Fund via Flickr, CC BY-NC-ND 2.0)
Federal Reserve Chair Janet Yellen (photo credit: International Monetary Fund via Flickr, CC BY-NC-ND 2.0)

At her June 17th press conference, Fed Chair Janet Yellen stated:

Returning to monetary policy, as I noted, the Committee reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate.  As we said in our statement, the decision to raise the target range will depend on our assessment of realized and expected progress toward our objectives of maximum employment and 2 percent inflation.

There obviously is nothing wrong with the Fed’s objectives of maximum employment and minimum inflation.  God, however, as Mies van der Rohe once said, is in the details. What to do?  It has been astutely noted that the Fed is in “uncharted territory.”

As the FT wrote on April 17th of this year, in a piece headlined “Federal Reserve and Treasury market face uncharted territory”:

The task of lifting interest rates from near-zero levels — when it finally happens — will be an unprecedented one for the US Federal Reserve. Never before has the central bank been faced with the challenge of starting to unwind such a vast amount of stimulus.

But venturing into uncharted territory does not stop there. Profound changes in the composition of financial markets — and in the menagerie of players operating in them — will make this a very different operation from when the Fed completed its previous interest rate tightening cycle in 2006.

It makes as little sense to have our shamans and pundits, rather than the Fed’s shamans and pundits, trying to get monetary right by guesswork … when none of the experts, ours or theirs, have a map.

We don’t know whether the Fed is right or wrong to forebear on raising interest rates.  Nobody knows. Nobody can know.  Trying to armchair quarterback the FOMC on interest rates is, under current circumstances, a mere parlor game.

In Dr. Yellen’s June 17th  press conference, Jon Hilsenrath of the Wall Street Journal said:

[R]elating to Congress, the Fed has resisted past efforts in Congress to pass measures like an audit the Fed bill or a measure to subject the Fed to a policy rule. There’s now a Shelby bill out there. I wonder if there’s anything in that that you can accept and, more broadly, whether there’s anything you could point to that Congress can do to make the Fed a more effective institution and a more accountable institution.

To which Dr. Yellen responded:

You asked about audit the Fed and the Shelby bill. The Shelby bill has a title in it that addresses a number of issues pertaining to the Fed. I suppose I would ask what exactly is the problem? We’ve placed high priority on being in accountable and transparent central bank and I think that if you compare the transparency of monetary policy decisions in the Federal Reserve with other central banks, we are one of the most transparent central banks in terms of the information that we provide to the public in a whole variety of ways. To my mind, the Fed is accountable and we work well as an institution. I’m not certain what the problem is that needs to be addressed.

What the problem is that needs to be addressed is: chart the territory.

In the last Congress, the Brady-Cornyn Centennial Monetary Commission, designed to do just that, was gaining momentum — it had gained 40 House co-sponsors — when the clock ran out.  This laudable legislation is designed to create a commission empirically to study the impact of the Fed’s policies on the economy — including both job creation and inflation.

As stated by Seth Lipsky in the Wall Street Journal on June 16th, “Will Congress Now Rein In the Fed?“, it is expected that Centennial Monetary Commission legislation will be reintroduced in the 114th Congress.  Lipsky:

Mr. Brady is also likely to reintroduce a version of his Centennial Monetary Commission Act, designed to take a more strategic look at the Fed as it starts its second century. Should there be a role for gold? Should there be rules?

The Commission is exactly what is needed right now.  It is designed to be a thoughtful, bipartisan, body to chart the territory.  That map will provide clear guidance to help the Fed navigate the uncharted territory in which it, through no fault of its own, finds itself.

As I observed in a column in Forbes.com two years ago, then Fed Chairman Ben Bernanke gave a speech. Toward the conclusion he said, “Both research and experience are needed to help the Fed and other central banks develop comprehensive frameworks that incorporate all of these elements.”

The stated purpose of the Commission?

The Commission shall–

(1) examine how United States monetary policy since the creation of the Board of Governors of the Federal Reserve System in 1913 has affected the performance of the United States economy in terms of output, employment, prices, and financial stability over time;

(2) evaluate various operational regimes under which … the Federal Reserve System … may conduct monetary policy in terms achieving the maximum sustainable level of output and employment and price stability over the long term, including–

(A) discretion in determining monetary policy without an operational regime;

(B) price level targeting;

(C) inflation rate targeting;

(D) nominal gross domestic product targeting (both level and growth rate);

(E) the use of monetary policy rules; and

(F) the gold standard; and

(3) recommend a course for United States monetary policy going forward….

The Centennial Monetary Commission is being proposed to address the most urgent need today: to chart the uncharted territory that has placed working families in the economic doldrums for fifteen years.

The Commission confidently can be expected to draw the chart that will show how the Fed most responsibly can execute the monetary powers delegated by the Congress to more proficiently achieve maximum employment and minimum inflation.

It is time for the Congress to enact the Centennial Monetary Commission and for the presidential candidates to pay attention.

Ralph Benko, internationally published weekly columnist, co-author of The 21st Century Gold Standard, lead co-editor of the Gerald Malsbary translation from Latin to English of Copernicus’s Essay on Money, is American Principles in Action’s Senior Advisor, Economics.