When Chair of the Federal Reserve Janet Yellen testifies before the House Committee on Financial Services this week, she will face a political and economic environment far different than she encountered during her last visit to Capitol Hill in September.
A new president has taken office, giving Republicans unified control of the federal government. And we are wasting no time addressing the regulatory overreaches and bad policies of the last administration that have hamstrung our economy, including the financial regulatory law known as Dodd-Frank.
While it is clear that regulatory burdens imposed by the Dodd-Frank Act have thwarted growth, investment and jobs — let’s not forget the harm the Federal Reserve’s unconventional monetary policy has inflicted on our economy.
As the chairman of the Subcommittee on Monetary Policy and Trade which oversees the Federal Reserve, I believe it is just as important that we consider reforms to make the Fed more transparent, accountable and predictable.
After the financial crisis and the Great Recession, the Federal Reserve departed from conventional monetary policy and employed unconventional tools that have hidden risks and increased uncertainty, and these have failed to deliver the robust economic growth predicted by Fed central planners.
These failings are exemplified by increased market volatility around Federal Open Market Committee hearings. In fact, some studies have suggested that investors can earn an entire year’s equity risk premium by timing their investments around FOMC meetings.
The Federal Reserve’s balance sheet has more than quadrupled from slightly under $1 trillion before the Great Recession to more than $4.5 trillion today after several rounds of quantitative easing, Operation Twist, and other ongoing reinvestments of matured assets. This enormous balance sheet puts taxpayers at risk, especially if interest rates rise, and distorts the free flow of capital that has sorely gone missing from our low-productivity recovery.
For the sake of families, businesses and taxpayers, we must replace today’s top-down monetary mischief with a policy framework where market prices give households and businesses the information they need to find their most promising opportunities. To accomplish these goals, I will work with the members of my subcommittee on a Federal Reserve reform package.
We do not seek to dictate policy to the Fed, but rather we would like to see a flexible strategy-based guidance on the federal funds rate created at the discretion of the Federal Reserve with detailed, transparent analysis. If market actors have a better gauge of where the Federal Reserve will take monetary policy, they will have greater certainty in making investment decisions and lending — optimizing capital allocation, which will be used throughout the economy to create jobs and real economic growth.
It is also my hope that our legislation will include an effective strategy to shrink the Federal Reserve’s balance sheet and limit its holdings to U.S. Treasuries. And finally, we will consider a provision that would prevent Congress from using the Federal Reserve’s resources to fund other government entities or federal projects.
I hope that Chair Yellen’s appearance before our committee this week will be an opportunity to discuss the benefits and the need for a more conventional, strategy-based monetary policy. Reforming the Federal Reserve will certainly be challenging, but for the sake of the American people and the trust they place in Congress, we owe it to them to do everything we can to create greater opportunities and the growth that enables the American dream.
- Barr represents Kentucky’s Sixth Congressional District in the U.S. House of Representatives. He serves as chairman of the House Financial Services Subcommittee on Monetary Policy and Trade.