by Gerald P. O’Driscoll, Jr.
I have been reading Central Bank Governance & Oversight Reform, edited by John H. Cochrane and John B. Taylor. It is a conference volume of unusually high quality with all the discussions of presentations included.
I plan to write more about the book later, but to highlight one chapter here. It goes beyond the usual topics, covered well in the book, on rules versus discretion, credible commitments, policy legislation, and the historical record.
Former Fed Governor Kevin Warsh introduced the conferees and the book’s readers to a literature on institutional design. His thesis is that policy is made by individuals in institutional settings, and these settings influence the decisions made by those individuals. Institutional design shapes the decision-making dynamic. He specifically examines how different monetary policy committees function depending on different MPC institutional designs. Warsh is circumspect in his assessment of how the FOMC functions.
Not so for Peter Fisher, the lead discussant of the paper. Among the entries on his bio is service at the New York Fed from 1985 to 2001, where he ended up as executive vice president and manager of the Federal Reserve System Open Market Account. That is a powerful position, which makes him a Fed insider of the first rank.
He starts by saying he is going “to try to be a little less sanguine and little less polite” than Warsh. He makes a strong point that whenever we seem to see multiple objectives, the problem is better faced as one objective with multiple constraints. In his view, neither the Fed nor central banks generally stack up very well in the one goal, multiple constraints framework.
Fisher then makes a novel and provocative argument, at least for economists. He claims that an elementary reading of Section 2A of the Federal Reserve Act shows that the Fed in fact has only one objective, not the so-called dual mandate. For Fisher, it is a matter of “elementary statutory construction” that any first year law student could employ to interpret section’s clear meaning. Here is Section 2A of the Federal Reserve Act in its entirety:
Section 2A. Monetary Policy Objectives
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
In Fisher’s analysis, there is a single objective and three measures of success. His textual analysis will challenge economists accustomed to sheepishly following the Fed’s own interpretation of statutes governing its conduct. Even if his analysis is correct, however, the section suffers from not specifying which aggregates the Fed should target.
Fisher also asks “would a careful lawyer think you could conform to this mandate by manipulating long-term interest rates as low as you possibly can in order to make people who have control of financial assets better off? No, I don’t think you could. I don’t think if you put [Fed counsel] Scott Alvarez on a witness stand, he could contort this statement to such an outcome.” This is pretty strong stuff from a former high Fed official, and a damning indictment of recent monetary policy.
He also paints a picture of a dysfunctional FOMC that “does not remotely square with effective decision-making.” He ends by calling for democratic accountability. “And before we write new laws, we should try to adhere to the ones we have.”
Fisher’s comments were followed by an excellent general discussion by, among others, George Shultz, Michael Bordo, Charles Plosser, and John Cochrane. There is much to learn from the exchange stimulated by Warsh’s paper.
 The dual mandate is one of price stability and full employment. The Fed has redefined price stability as 2-percent inflation, something worthy of a post in itself. What constitutes full employment remains ambiguous,