The Fed's 'Dual Mandate' is outdated. Congress established these guidelines in November 1977, forty years ago.
The economic and regulatory backdrop today is 180 degrees from the environment of the 1970’s.
The 1970’s economy was plagued by rising inflation due to the oil embargo that led to a significant rise in the price per gallon at the gas pump.
Today there’s an oil glut thatis keeping inflation below 2%.
The first Fed mandate is maximum employment. President Trump’s campaign pledge was “jobs, jobs, jobs”, while Fed Chair Janet Yellen is worried about a tight labor market.
The second mandate is stable prices and today the economy is benefiting from lower energy costs as the country shifts 180 degrees from being under the thumb of OPEC, to becoming an energy exporter. Monetary policy should be blessing lower gasoline prices when 70% of families on Main Street are living paycheck to paycheck.
In today’s economic backdrop, the Federal Reserve thinks that the labor market is too tight and that raising rates is the prudent strategy. This month the FOMC is beginning to unwind its $4.5 trillion balance sheet. The Fed is struggling to raise the inflation rate to its mandated target of 2%. This requires higher energy prices, which is the most important component of underlying inflation.
Back in the 1970’s inflation was rising and peaked in 1979 with an annual rate of 9%. That made the 2% target an important objective. Today, inflation below 2% due to lower energy costs and this trend should be encouraged.
Quantitative easing is not a part of the Fed’s dual mandate, and was not presented to congress for approval. In layman’s terms, quantitative easing was a program where the Fed bought U.S. Treasuries and Federal Agency securities by printing money that accumulated to $4.5 trillion on their balance sheet. I will call QE American’s savings account.
Now the Fed says we don’t need this savings account just when President Trump wants to repeal and replace Obamacare, offer much-needed long-overdue tax reform and raise $1 trillion for infrastructure spending. Congress should mandate that the proceeds of maturing treasury and agency securities be deposited in Treasury accounts to spend as needed for America’s needs.
Then there’s Dodd-Frank regulations, which were designed to protect Main Street, but instead squeezed savors, homeowners and small businesses.
For example, before Dodd-Frank, 75% of checking accounts had no fees. By 2012, only 39% had no fees and the total fees have risen to $15 billion a year.
The Federal Reserve under Fed Chair Yellen has been ignoring the economic pledges made by president Trump during his successful election campaign.
President Trump now faces both the political challenges in the Washington DC swamp and the foolish monetary policy decisions made by the Fed. The quantitative easing experimentation bailed out our nation’s biggest banks leaving citizens on Main Street suffering. Savors could not save!
Dodd Frank regulations choked prudent borrowing and lending programs, rates on small businesses and credit card users just kept rising. This conflict needs to end!
President Trump wants to appeal Dodd-Frank, Yellen does not.
Instead of waiting for January to begin to unwind the Fed’s $4.5 trillion balance the Fed decided to begin in October. This is grounds for Trump to fire Yellen!
Overly simplified, the Yellen Fed is not on the same economic page as the Trump administration and modernizing the Fed’s mandate should be a priority.