The House Subcommittee on Monetary Policy and Trade on Wednesday held a hearing to examine the Federal Reserve’s departures from conventional monetary policy and how a more transparent policy strategy could better support economic growth in the future.
“A decade of economics-free monetary policy is not working because it cannot work,” said Subcommittee Chairman U.S. Rep. Bill Huizenga (R-MI). “Returning to a robust economy requires a more firmly grounded and transparent policy. That transition cannot happen until the Fed shrinks its balance sheet, brings interest rate and credit risks out of the bureaucratic shadows.”
John B. Taylor, professor of economics at Stanford, said the Fed’s policy of keeping interest rates excessively low may have been counterproductive, citing evidence that economic growth was consistently below the Fed’s forecasts and has been much weaker compared to earlier U.S. recoveries. Additionally, Taylor said job growth has been insufficient to raise the percentage of the population that is working above pre-recession levels.
“Recent trends make it increasingly clear that economic performance has been constrained by factors that are beyond the scope of monetary policy,” said Mickey D. Levy, managing director and chief economist of Berenberg Capital. “The slow growth has much less to do with the Fed than real, non-monetary issues, particularly growth-depressing economic, tax and regulatory policies.”
Simon Johnson, professor of global economics and management at the Sloan School of Management at the Massachusetts Institute of Technology (MIT), largely agreed with the testimony, adding that while any sensible central bank would consider dramatic measures to prevent another Great Depression, the range of policy options will depend on the income level of the country and “fiscal space” available.
The subcommittee is set to reconvene at a later date to be determined.