House Financial Services Monetary Policy Hearing on Sound Monetary Policy

Key Topics & Takeaways

Monetary Policy: The hearing featured a recurring debate on whether the Federal Reserve should retain its power to set monetary policy without Congressional input, or if Congress should adopt a “rules-based system” for setting monetary policy. Many Republicans argued that a rules-based approach would create more predictable monetary policies for businesses and bring transparency to an opaque decision-making process. Democrats argued in favor of keeping the Feds monetary policy authority independent and flexible

Federal Reserve Balance Sheet: Several of the witnesses were highly critical of the large size of the Fed’s current balance sheet and called for the Federal Reserve to begin winding down its assets. Some argued that the purchases of large numbers of mortgage-backed securities are an example of the Fed overreaching its authority to influence the economy, particularly in the housing sector.

Regulatory Issues: Several witnesses were also highly critical of the regulatory measures the Federal Reserve has enacted since the 2008 Financial Crisis, though there was not a detailed discussion on this topic. Jon Allison argued that new regulations have hurt the ability of banks to lend and have cut off capital to the rest of the economy, and the impact of this has been magnified by chronically low interest rates.


Jon Allison, Executive in Residence, Wake Forest School of Business, and former Chairman and CEO, BB&T Corporation

Dr. Marvin Goodfriend, Professor of Economics, Carnegie Mellon University, and former Director, Research and Policy Advisor, Federal Reserve Bank of Richmond

Dr. John B. Taylor, Professor of Economics, Stanford University

Dr. Josh Bivens, Director of Research, Economic Policy Institute

Opening Statements

In his opening statement, subcommittee Chairman Andy Barr (R-Ky.) engaged in a broad criticism of the Federal Reserve’s (“Fed”) monetary policy. He began by discussing what he called “clear” evidence of slow productivity growth in the economy, and criticized Fed Chair Janet Yellen for dismissing productivity growth concerns in her recent testimony before the full House Financial Services Committee. Barr returned several times to the issue of productivity, which he named as a major obstacle to economic security for Americans. Barr criticized current monetary policy as being both opaque and “data dependent in name only” and alleged that uncertainty about Fed decisions has harmed economic growth. He called on the Fed to use “clear monetary policy” to grow the economy and end the “malaise” of the last eight years. He also criticized the Fed for keeping interest rates below 1% since the crisis, noting that “bad news delayed rate increases, but good news did not speed them up.”  Barr closed by calling on the witnesses to help the committee establish a new economic strategy to help “all Americans.”

In her opening statement, Ranking Member Gwen Moore (D-Wis.) discussed the 2008 financial crisis and the accompanying dramatic actions the Fed undertook to stabilize financial markets and the economy.  Moore countered Barr’s opening statement by arguing that the Fed’s policies have been successful, and have contributed to the current sub- 5% unemployment rate. Moore also posited that the interest rate increase announced on March 15th is “a judgement that the economy is healthier.” Moore agreed that the post-2008 economic recovery has been uneven, but she argued that “fiscal austerity measures” are more to blame than monetary policy. Moore closed her opening remarks by calling on Congress and the Trump Administration to help homeowners, and voiced support for the Department of Labor’s fiduciary duty rule.


Jon Allison, Executive in Residence, Wake Forest School of Business, and former Chairman and CEO, BB&T Corporation

In his testimony, Jon Allison stated his belief that actions by the Fed exacerbated several financial crises in the last few decades.  Allison said that the Fed often creates worse long-term problems in dealing with short-term problems through monetary policy. He described this as inevitable, given that the job of the Fed is “impossible.”  He also described the Fed’s interest rate setting activities as “price fixing,” and described interest rates as “one of the most important prices in the world.” In his testimony, he also endorsed a “rules-based system” to govern monetary policy, saying that while rules would not lead to perfect outcomes, he did believe it would yield better results. Allison frequently emphasized the impact on businesses of monetary policy, saying that the private sector cannot make reliable, long-term plans due to the unpredictability of Fed actions. He closed by criticizing the Fed’s low-interest rate regime, arguing it has hurt deposit rates at the expense of helping equities, and criticized regulatory measures he believes have harmed lending.

Dr. Marvin Goodfriend, Professor of Economics, Carnegie Mellon University, and former Director, Research and Policy Advisor, Federal Reserve Bank of Richmond

In his testimony, Goodfriend testified on why the Fed needs a credible commitment to price stability, and described the Fed’s current commitment to price stability as severely lacking in reliability. Goodfriend argued that this credibility issue creates three risks for the economy. First, when the public is unsure of the Fed’s sincerity in meeting its inflation targets, the Fed must compensate with preemptive and premature rate increases. Second, weak inflation target credibility can invite what Goodfriend described as “cyclical inflation-fighting risk premia in bond rates.” Third, inflation fears discourage the use of bonds by households as a form of savings, and encourages people to invest in shorter-term equity products.

Dr. John B. Taylor, Professor of Economics, Stanford University,

In his testimony, Taylor said the Fed departed from conventional policy in 2004, when it held federal funds rate well below what historical indicators would identify as an appropriate level. Taylor argued these excessively low rates encouraged risk taking, especially in the housing market, as capital moved into that market in search of yields. Taylor conceded that during the panic the Fed did a good job as a lender of last resort. However, since then the Fed has kept interest rates at 0% (or slightly above) though historical indicators would have pushed rates higher, and sooner. Taylor encouraged the Fed to move back to a conventional monetary policy, saying that while “normalization is difficult” it should be undertaken. He also endorsed shrinking the Fed’s balance sheet. Finally, Taylor discussed how monetary policy can support economic growth by being more predictable, fair, and accountable, and in his written testimony he explicitly stated his supported for a “rules-based” approach to monetary policy. Specifically, he said the Fed’s Open Market Committee (FOMC) should explain its policies to Congress, and while not endorsing a mechanical or rigid formula to determine monetary policy, did stress that improving the instruments of monetary policy and mandating more Congressional oversight of the Fed are neither unreasonable nor unprecedented.

Dr. Josh Bivens, Director of Research, Economic Policy Institute

In his testimony, Bivens differed sharply from Taylor, Goodfriend and Allison in his assessment of the Fed and its monetary policies. Bivens argued that Fed successfully shortened the recession and encouraged the recovery. Bivens argued that the balance sheet expansion, while unusual, is justifiable as a policy response to an extraordinary crisis. Bivens also argued that the weak recovery is driven by “relative fiscal austerity” and claimed that weak government spending has “put a drag on the recovery.” Bivens also criticized the idea of relying on a rule-based framework for monetary policy, arguing that “no rule during the [2008] crisis” would have performed as well as the independent Fed, with its ability to experiment. Bivens also argued that the growth in the size of the Fed’s balance sheet has helped households and businesses, by pushing long-term interest rates down. He specifically argued that purchases of mortgage-backed securities (MBS) reduced spreads between MBS and other risk-free benchmarks. Bivens closed by arguing that any balance sheet reduction should occur after interest rates have reached normal levels. 

Question & Answer

Monetary Policy

The hearing featured a recurring debate on whether the Fed should retain its broad power to set monetary policy without Congressional input, or if a “rules-based system” for setting monetary policy should be embraced in statute.[1] While there was some discussion of the Fed’s low-interest rate approach since the crisis, discussion focused on the proper way to formulate interest rates as opposed to current policy. Barr did begin his questions with criticism of the low-interest rate approach, which he argued has created an “unhealthy relationship” with financial markets

Barr led off the discussion by asking witnesses if the Fed ought to rely on a rules-based approach to monetary policy.  Allison, Taylor, and Goodfriend agreed with this idea, saying that predictability would help the business community and make the Fed more accountable. Bivens disagreed that the Feds “improvisational” monetary policy adds confusion to markets. Taylor spoke frequently during the debate on his proposed rules-based system, which he argued would still allow deviations in crises and allow the Fed to act as a lender of last resort. 

Rep. Robert Pittenger (R-N.C.) asked if perennially low interest rates encouraged the Obama administration to run large deficits. Goodfriend argued that debt in the Obama era was a “freebie” due to low interest rates, but that taxes will need to be “much higher” in the future to service those debts.

Rep. Al Green (D-Texas) criticized the idea of a “formula-based method” for determining interest rate levels. He challenged the witnesses to name other major countries that used such a formula, and witnesses noted that there are none. Bivens argued that a rules-based policy for setting interest rates could “tie policymakers’ hands” in a crisis, and could have unintended trade and economic effects.

Green later initiated a discussion on the Fed’s independence generally. Bivens argued that most economists believe the Fed should be independent. Bivens also argued that GAO audits could hurt Fed independence but did state that all government agencies should be “occasionally examined.” Rep. Tom Emmer (R-Minn.) took the opposite line, arguing that there is a difference between independence and accountability. 

The Federal Reserve Balance Sheet

Barr also initiated the discussion on the Fed’s balance Sheet. Several witnesses argued that the purchase of non-Treasury assets, especially MBS, constitutes credit allocation, and that this allocation is a political decision that violates the Fed’s mission. Furthermore, the Fed made this decision without consulting Congress or allowing Congressional oversight of its purchases.

Rep. Roger Williams (R-Texas) asked if the current size of the Fed’s balance sheet and its impact on the economy. Taylor argued that quantitative easing had only a short-term boost on the economy.  Taylor also said that not all of quantitative easing’s effects were positive, as keeping interest rates artificially low hurt the ability of banks to make money from loans.

Rep. French Hill (R-Ark.) asked if the Fed should limit its open market operations to Treasuries, to which Allison, Goodfriend and Taylor all agreed. Taylor argued that the Fed could begin unwinding its balance sheet now, if the process was gradual and clearly communicated to markets.

Regulatory Issues

Rep. Brad Sherman (D-Calif.) asked the witnesses how the federal government could encourage more lending, especially to small and mid-sized businesses. Allison argued that regulatory burdens are a key impediment to small business lending, and specifically criticized the Fed and the Federal Deposit Insurance Corporation (FDIC) for unnecessarily difficult lending regulations. Allison later argued that “more damage has been done by the Feds regulatory policies than the Feds monetary policies.”

The Fiscal Impact on Monetary Policy

Moore led off the questions on fiscal policy by asking Bivens about the relationship between federal spending and the recovery. Bivens agreed that the post-2008 financial crisis is the slowest in U.S. history, but argued that the 2011 Budget Control Act, as well as what he described as “low historical levels” of public spending, explain the recent performance of the economy.

Rep. Daniel Kildee (D-Mich.) asked Bivens to comment on the impact of monetary policy in the event of dramatic cuts to discretionary federal spending. Bivens, reiterating his point that relative austerity is the main drag on the economy today, argued that reducing federal spending, particularly on programs that encourage workforce development, would slow the economy down. Taylor disagreed with this assessment, arguing that the 2009 American Recovery and Reinvestment Act (commonly known as the ‘Stimulus Package’) was largely ineffective, despite its size. 

Rep. Warren Davidson (R-Ohio) displayed a chart for the committee outlining federal debt as a percent of GDP, and asked the witnesses if the growing debt levels relative to GDP was evidence of an “austere fiscal policy.” All but Bivens disagreed, and several stressed the dangers of current deficit levels.  Taylor also argued that tax reform is a critical part of encouraging growth, and said that monetary policy cannot solve every economic issue facing the U.S. 

The Federal Reserve’s Dual Mission

Rep. Mia Love (R-Utah) asked if the addition of ensuring maximum employment to the Fed’s mandate was in the best long-term interest of the country. Allison disagreed, saying that employment levels should be driven by the private economy. Allison argued that the Fed should focus exclusively ensuring price stability. Goodfriend went farther, arguing that the dual mandate is “incoherent.” Taylor argued that when the Fed focused overwhelmingly on inflation in the 1980s and 1990s, the economy did well, because by largely ignoring labor markets the Fed could develop better inflation policies.

For more information on this hearing, please click here.

[1] For more information on rules-based systems, please refer to Taylor’s written testimony, which discusses the so-called “Taylor Rule.”