House subcommittee examines how Federal Reserve policy supports economic growth

Experts testified at a House subcommittee last week on how the Federal Reserve has departed from conventional monetary policy and how monetary policies can support economic growth going forward.

“Today’s monetary policy is data-dependent in name only. It is a policy that never tells us what data matter, let alone how they matter,” Rep. Andy Barr (R-KY), chair of the House Monetary Policy and Trade Subcommittee, said. “It is a policy that continues to leave households and businesses scratching their heads about when and where oracles from the Fed’s Eccles Building will turn next. It is a policy that creates uncertainty instead of clarity. It is a policy that has weighed on productivity from its start a decade ago.”

John Allison, executive in residence at Wake Forest School of Business, and former chairman and CEO of BB&T Corporation, said if the Federal Reserve does not withdraw the tremendous reserves it has created from the banking system, inflation will result.

“If it does withdraw the reserves quickly, interest rates will rise rapidly,” Allison said. “This situation makes economic calculations extremely difficult and makes businesses less willing to invest, especially for the long term. If business owners could fully trust the Fed, this would not be an issue, but we have all been burned too many times to trust the Fed.”

John Taylor, professor of economics at Stanford University said that he has witnessed a more determined effort from the Federal Reserve to normalize policy.

“But normalization, or transition, is difficult in practice, and at times the pace has been slow and uncertain,” Taylor said. “With the policy interest rate still below appropriate levels, a key step is to raise the policy rate gradually and strategically.”