ON-Lion Letter
"When the Federal Reserve was created in 1913, Congress did not give it a monetary policy goal as we understand that term today," begins a February analysis from the National Center for Policy Analysis (NCPA) in Dallas by its distinguished fellow Bob McTeer.  "The Fed's monetary policy role evolved gradually, and congressional mandates -- such as achieving full employment and price stability -- came later.  Now the question is back at the forefront:  What should the Fed be doing?"

McTeer had a 36-year career with the Federal Reserve System, including 14 years as president of the Federal Reserve Bank of Dallas and member of the Federal Open Market Committee.

"Congress created the Fed in response to financial panics culminating in the Panic of 1907," McTeer writes in "The Fed's Mandate."  "The Fed was to fix this problem by centralizing bank reserves -- hence the name, Federal Reserve System.  The Fed was to bring flexibility to the banks' reserve base and 'elasticity' to the currency supply."  Also, "The Fed could lend to the banks by discounting their high-quality bank loans. The Fed's discount window (lending facilities) and its discount rate offered greater flexibility, and hence stability, to the banking system.

"As Fed lending declined during the 1921 recession, it bought some Treasury securities for income," he continues, and "[l]egislation authorizing the Fed to change bank reserve requirements, the third tool of monetary policy, came in the mid-1930s, when Congress also formalized the role of the Federal Open Market Committee (FOMC) in open market operations."  Then, "The Full Employment Act of 1946 formally mandated that the Fed pursue full employment and price stability, although specific targets were lacking."

"Over the years," McTeer concludes, "I believe the majority of Open Market Committee members favored a single mandate of price stability -- not all, but probably a majority.  Making a single mandate formal, however, didn't seem worth the danger that bringing the topic up might open Pandora's box.  

"I'm surprised, therefore, that proposals for a single inflation mandate would come up now, during this period of low inflation and high unemployment. After all, the Fed's extraordinary efforts to fight the recent recession have not, in fact, increased inflation -- not yet anyway. But I guess I should leave the politics to the politicians."

The Lynde and Harry Bradley Foundation in Milwaukee substantially supports NCPA.
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