▶ 0:14:45The task force on monetary policy, treasury market resilience, and economic prosperity will come to order. Without objection, the chair is authorized to declare a recess of the committee at any time. This hearing is entitled Less Mandates, More Independence. Without objection, all members will have five legislative days within which to submit extemporaneous materials to the chair for inclusion in the record. I now recognize myself for four minutes for an opening statement. Welcome to today's hearing.
▶ 0:15:14The purpose of our meeting today is to examine the Federal Reserve's mission of price stability, maximum employment, and moderate long-term interest rates. Central banks around the world approach their mandates in a number of different ways. There's more than one way to do the job. Many have financial stability mandates or economic growth objectives. Some have an explicit inflation target or prioritize mandates in order of importance.
▶ 0:15:42But the piece that they all have in common is price stability. Without that essential function of maintaining stable prices, a central bank has no value. In our country, we assigned the Fed to deal with monetary policy and credential matters.
▶ 0:15:59After the passage of DoddFrank, these credential functions expanded This summer marked the 15th anniversary of that law, and today we are still dealing with the consequences of the dramatic changes it made to our financial system. A concern I continue to have all these years later is that broadening the authority of the Fed's regulatory and supervisory roles ultimately politicizes the institution and threatens its independence.
▶ 0:16:29Our Treasury Secretary said it best. Overuse of non-standard policies, mission creep, and institutional bloat threaten the central bank's independence. Simple and measurable tools aimed at a narrow mandate are the clearest way to deliver a better outcomes and safeguard central bank independence over time. The Fed should solely focus on its twin mandate and the safety and soundness of its member banks.
▶ 0:17:00Expanding its regulatory reach through unaccountable international agreements or otherwise ill-defined third and fourth mandates distracts the Fed from doing its congressionallymandated job well. The Fed's actions must stay squarely within congressional intent. Vice Chair Bowman has made very positive changes on this front since the last administration, focusing on correcting mistakes of the past.
▶ 0:17:28I look forward to continuing to work with her on a capital framework that promotes growth in our economy and I welcome a wholesome discussion today where we can listen and learn from one another. And with that, I yield back. I now recognize the ranking member of the task force, Mr. Vargas, for four minutes for an opening statement. Thank you very much, Mr. Chairman, and I also want to thank all of the witnesses that are here with us today. Thank you very much for being here.
▶ 0:17:56Since 1977, Congress has given the Federal Reserve clear objectives to promote both employment, maximum employment, and stable prices. The Fed's dual mandate is critical in addressing the key way most American experience of the economy, and that's through their jobs. And it has played a pivotal role in maintaining a healthy labor market. But the Fed is best able to deliver on this mandate when it is independent from political interference.
▶ 0:18:26There have been attempts by presidents to shape the Fed's monetary policy in the past, but nothing compares to President Trump's ongoing campaign to take control of the Fed. First, he lashed out at Chairman Pal on social media, saying, quote, "Terminate termination cannot come fast enough." End of quote.
▶ 0:18:43Then, President Trump said that the fact that the building renovation cost the Fed went over budget was a quote fireable And now he is attempting to illegally remove federal board governor Dr. Lisa Cook. All the while installing a White House employee, taking a quote unpaid leave of absence at the Fed board The end goal here is clear. President Trump is attempting to take over the Fed. But don't take my word for it.
▶ 0:19:11Larry Cuddlo, the president's former director of National Economic Council, said, quote, "The bottom line is this. President Trump's ongoing Trump's going to take the Fed over, as he should, and end of quote. He wants control of the Fed in order to bail out his failing economic agenda. That agenda has slowed growth, weakened job numbers, and persistently delivered above target President Trump needs a scapegoat because Americans simply aren't feeling the economic relief he promised.
▶ 0:19:42So, he's now seeking to convert the Fed into an extension of his of his administration. And that really is a terrible idea. There's good reason why there has been a long-standing bipartisan consensus that a president should not be able to dictate monetary policy. Short-term political interests do not always align with what is good for the long-term health of the American economy. And there are real world consequences when those political interests override the central bank. We've seen this happen before both domestically and abroad.
▶ 0:20:12In the 1970s, we saw President Nixon's pressure campaign on then chairman Arthur Burns and it led to an environmental rip and environmental rip for stagflation. In recent years, we saw President Eradon takeover of the Turkish central bank lead to their currency reaching an 85% 85% inflation rate.
▶ 0:20:35It is clear to every objective observer that President Trump is searching for pretext to take control of the Fed and adjust the federal funds rate as he sees a fit. This will harm American workers, consumers, and businesses alike. And I'm hoping my Republican colleagues will help us to make sure that Congress does not just stand by and let it happen. With that, I yield back the balance of my time.
▶ 0:20:59Gentleman yields back. Today, we welcome the testimony of Dr. Dr. Douglas Holtz Akin, president of the American Action Forum, Mr. Alex Pollock, senior fellow of the MISE Institute. Uh, Mr. Curtis Dubet, chief economist at the United States Chamber of Commerce, and Mr. Scandu Armmont, executive director of Employee America. And you can correct me when your turn comes.
▶ 0:21:29We want to thank each of you for taking time to be here. Each of you will be recognized for five minutes to give an oral presentation of your testimony. And without objection, your written statements will be made a part of the record. Dr. Holtz Aken, you are now recognized for five minutes for your oral remarks.
▶ 0:21:47Well, thank you, Mr. Chairman, uh, Ranking Member Vargas, and members of the task force. It's a privilege to be here today. Uh, let me briefly make three points. Um the first is I I uh wholly embrace the title and objective of this hearing which is to have fewer mandates and more independence for the Fed.
▶ 0:22:04Uh the uh constitution gives the authority to for coinage and for regulating the value of uh money to the congress and the congress has delegated this to the federal reserve and that in and of itself is uh a very large job. But in addition, they've acquired tasks on financial stability uh in the aftermath of DoddFrank macro credential regulation uh bank holding company regulation uh at times uh concern about climate finance and other considerations.
▶ 0:22:34Uh this is simply too many jobs for a single entity and uh fewer mandates I think are 100% the way to go. And I just want to echo um what the chairman said about the politicization of the Fed in the aftermath of DoddFrank.
▶ 0:22:47I've been deeply concerned that given so many regulatory and supervisory supervisory uh tasks uh when when the the uh banks aren't happy they go to the appeals court which is the US Congress and invites uh politicizing this and I think uh to have fewer mandates would be an big enhancement in their independence. So where where should uh Congress go with the Fed?
▶ 0:23:10uh I think on balance that uh for monetary policy the economy would benefit from the movement to a single mandate on price stability and that um this would uh have other improvements for uh the Federal Reserve as well. So the the version I prefer is a a price level mandate with a target for the price level and I can elaborate on that in the question period but uh to do so would provide uh much more accountability for the Fed. they would announce their target.
▶ 0:23:40They would you can see where they ended up. Uh it's clear whether they're being successful or not and they can uh come to the oversight hearings and Congress can ask them why they have or have not failed and and and know uh in a very clear and transparent way what what they have to attempt to do and have some accountability for the outcomes. Uh I think it would improve the quality of monetary policy in terms of communications and forward guidance.
▶ 0:24:04uh with the dual mandate uh every Fed chair has struggled to try to convey how they view the trade-off between the price stability and the employment mandates and uh uh people interpret their words differently and markets end up confused and the clarity of the monetary policy signal is muddled with a single mandate uh you eliminate that you can convey to markets uh what they really need to know which is what is the outlook for long-term interest rates in the United States and what kind of capital invest investment plans
▶ 0:24:34do you want to make in that environment? And I think that would improve uh the quality of the monetary policy that the Fed's trying to to achieve. Third thing would do is uh really help them with their independence. Uh I think uh uh anytime there's a dual mandate with an unclear weight on inflation or unemployment, there's going to be a real temptation for political actors to put their thumb on the scale and change what the Fed is up to. And they'll be left alone to do their job uh I think much more under a single mandate.
▶ 0:25:03Then I I'll just close with the third point which is um this is hardly a slam dunk. Uh there are central banks around the the globe that have single mandates for inflation targeting. Uh we no one's ever yet gone to a price level mandate. So that's that is another thing to investigate investigate carefully. But the most uh important concern I have is that the Fed needs the continued support of the American public. They have to trust the Fed and believe in it.
▶ 0:25:29And I'm concerned that having a a single mandate on inflation or prices uh would be conveyed as the Fed doesn't care about the unemployed. And that would be a wrong uh but bte attempting uh mischaracterization of the Fed's mission. And so moving to a single mandate I think would be valuable and have benefits but should be done carefully and with a maximum of uh public education. So thank you for the chance to be here today. I look forward to your questions.
▶ 0:25:55Thank you Dr. uh Mr. Pollock. You are now recognized for five minutes for your oral comments.
▶ 0:26:00Thank you, Mr. Chairman, ranking member of Argus, members of the task force. My specific topic is how Congress should oversee the Federal Reserve's mandates. Although the Federal Reserve itself and its supporters endlessly assert that the Fed is and should be independent, I believe that no agency of the government can or should be independent. Period.
▶ 0:26:25The Fed is independent of the executive, but it is fully accountable to the Congress, including the Congress oversight of the Fed's massive losses and technical insolveny, which I'll touch on more in a minute. The chairman asked how many mandates there are. I count eight mandates that the Fed has been given.
▶ 0:26:48These are provide an elastic currency the original finance the government key promote stable prices maximum employment and moderate long-term interest rates regulate the financial system for stability make money for the government and pay for the consumer financial protection bureau. The original Federal Reserve Act began with creating an elastic currency.
▶ 0:27:16Now, since 1971, our currency has become more elastic than the founders of the Fed could ever have imagined, uh, enabling a goal of perpetual inflation or low and stable inflation as the Fed often describes it. But the statute says stable prices, not stable inflation. And these are very different.
▶ 0:27:40Uh the Fed has defined price stability as inflation forever at a 2% rate. At 2% average consumer prices will quintuple in a lifetime of 80 years. At 3% and at the moment we're at 2.9. Prices will go up 10 times. Is that what stable prices means? Uh when he was Fed chairman, Ellen Greenspan said he thought the correct inflation target was zero. properly measured.
▶ 0:28:10The Humphrey Hawkins Act of 1978 contained a long-term goal of inflation for zero. I'm and we can debate what it should be, but it's uh what stable prices means needs attention. I'm of the view that the most important thing the Fed can achieve is to provide stable prices with sound money that the people can, should, and do rely on.
▶ 0:28:36and that this is also the best possible contribution the Fed can make to maximum employment, economic growth, and responsible government. Uh for improved accountability of the Fed, I suggest Congress should take the following actions more fully described in my written testimony. One, enact a sound money mandate.
▶ 0:28:58I believe Congress should add to the Federal Reserve Act the statement that the most fundamental responsibility of the Fed is to furnish a sound currency that the people can and do trust as essential to economic growth and responsible government.
▶ 0:29:14Two, I think Congress should make it explicit the Fed must have congressional approval to commit the country to a long-term inflation target and take on I believe the Congress should take on an immediate review of the 2% inflation forever target which the Fed unilaterally announced without the approval of Congress.
▶ 0:29:35Uh, this review should then define what stable prices means as a direction for the Fed consistent with Congress's constitutional duty to regulate the value of money. Three, Congress should carry out regular formal oversight of the Fed's financial statements, including its $240 billion in operating losses. It's pretty staggering loss, you have to say.
▶ 0:30:02It's impossible to believe that the Fed intended to lose $240 billion for itself, but more importantly, it's lost it for the taxpayers. These are taxpayer dollars, and Congress should thoroughly understand what's going on in the Fed's finances. It moreover, in my view, should require the Fed to use uh standard accounting.
▶ 0:30:25Uh, Congress number four should direct the Fed to get out of the business of its market distorting mortgage investments which were supposed to be temporary and aren't. Five, Congress should study recapitalizing the Fed whose true combined capital accounted for correctly is now an embarrassing negative $195 Six and fin and finally, I think this task force is a great idea, but I do respectfully suggest
▶ 0:30:56the banking committee should consider forming subcommittees on the Federal Reserve, and that the massive economic and financial power of the Fed, its ability to create global systemic risk, and the difficulty of the questions involved would warrant such a step forward in accountability. Thank you for the chance to share these views.
▶ 0:31:17Thank you, Mr. Pollock. Mr. Dubo, you are uh recognized for 5 minutes for your oral comments.
▶ 0:31:23Mr. Chairman, ranking member Vargas, thank you for the opportunity to testify today. The US Chamber is proud to be the world's largest business organization representing representing companies of all sizes, including small and midsize businesses as well as state and local Today's hearing is particularly important for small business small and midsize b mid-size businesses as they are often forgotten in the debate about the setting of proper monetary policy.
▶ 0:31:49When prices rise, small and mid-size businesses have much less ability than larger businesses to manage price increases. They lack the scale to negotiate with suppliers and the capital necessary to endure short-term losses. Many small and mid-size businesses rely on bank loans, which are of course closely linked to Fed actions. Today, I'll make three points. First, a single mandate and independence are best for the Fed.
▶ 0:32:17Second, if a dual mandate is to continue, it should be clear that price stability is the more important mandate if it and the full employment mandate ever come into conflict. And lastly, the Fed should never have another mandate. To ensure that businesses in our economy can thrive, the Fed needs fewer mandates and more independence. Ideally, the Federal Reserve should have the sole mandate of keeping prices stable. A sole mandate of stable prices provides the best environment for the Fed to achieve its goals.
▶ 0:32:47Additional mandates divert its attention from what should be its core function of keeping prices stable and risk that it will not do this extremely important job as well as it Aside from a mandate of stable prices, the only other functions the Fed should serve should be to supervise the banks that are its members and to act as the lender of last resort. Both of these jobs are part of setting monetary The Fed also needs independence to do its job well.
▶ 0:33:15The Fed the setting of monetary policy is complicated in the best of circumstances. The Fed and the FOMC must sift through an enormous amount of data and analyze it to determine what it means for the future course of the economy and its and prices. Interference in that difficult endeavor makes a hard task even harder. However, the Fed does not have a single mandate. It has a dual mandate that also includes full employment.
▶ 0:33:41Full employment is best pursued through sound fiscal and regulatory policies which are outside the Fed's purview. Congress should make clear that if the two mandates ever conflict, the Fed is to prioritize stable prices. Historically, the aim of full employment has been complimentary with stable prices and has not inter interfered in the Fed's ability to target its pro chosen price level.
▶ 0:34:07For instance, when the economy faltered in at the beginning of the CO9 pandemic, the Fed lowered interest rates again to keep prices from falling, which also supported a weakening labor market at the time. But the economy and the labor market are changing in a way that increases the risk of the dual mandates conflicting. While Congress has been fortunate that dual man mandates have never created a problem to date, this may not hold going forward.
▶ 0:34:30For instance, the Fed was aided in its recent task of lowering inflation without raising unemployment to an unacceptably high level because of our changing demographics. An aging population means we are short several million workers compared to pre-COVID labor force participation rates. When the Fed raised interest rates starting in March of 2021, unemployment did not rise sharply because businesses needed workers so badly. They held on to the workers they had and kept hiring even as interest rates rose.
▶ 0:34:58This remains the case today, albeit at a slower pace. The worker shortage is unlikely to change anytime soon and could create more tension between monetary policy that prioritizes full employment and stable prices. More job creation during a period and workers are scarce will drive wages up, which in turn will put upward pressure on prices.
▶ 0:35:18The until now complimentary nature of stable prices and full employment is not necessarily replicable and adding another mandate could seriously impair the Fed's ability to achieve its goals while introducing enormous risks risks ones that are not in remotely worth taking. It is also highly likely that the Fed does not have the tools necessary to achieve another mandate. So with the Fed's already full plate, Congress should focus on policies that lead to fewer mandates and more independence from political pressure.
▶ 0:35:47This will create a better environment for the Fed to achieve its goals, helping small businesses and ultimately the American people. Again, thank you for the opportunity to testify today. The chamber stands ready to work with the task force and all members of Congress to develop and implement policies that promote economic growth, innovation, and opportunity for all Americans. I look forward to answering questions you may have.
▶ 0:36:08Thank you, Mr. Duby. Mr. Arnoth, you are recognized for five minutes for your oral remarks. Thank you, Chairman Lucas, Ranking Member Vargas, and distinguished members of the task force. The moment couldn't be critical for discussing how Congress sets the Fed's objectives, holds the Fed accountable, and ensures the independent operation of monetary policy. I'll make a few points. One, the multiple objectives in section 2A of the Federal Reserve Act support credible and independent monetary policy precisely because they make trade-offs in monetary transmission more transparent.
▶ 0:36:39Two, the Fed's maximum employment mandate has allowed it to outperform singlemandate central bank peers at critical moments when supply-driven inflation collides with slow labor market activity and nominal spending. Three, any credible case for interest rate cuts today and in the future depend specifically on the maximum employment mandate and should be specified in statute if that's the case.
▶ 0:37:02Four, a congressionally accountable, operationally independent Fed is critical to ensuring stable long-term interest rates alongside stable inflation outcomes. Five, Congress designed the struct current structure of monetary policym in 1935 with operational independence top of mind with with Congress being the key source of accountability. Americans deserve a central bank that makes apolitical decisions, reason from economic data, financial system developments, and transparent assessments of risks and trade-offs.
▶ 0:37:30Section 2A of the Federal Reserve Act, which includes the dual mandate, serves that very purpose. The call for less mandates is understandable, but a red herring for accountability and independence. Section 2A's dual mandate promotes transparent weighing of trade-offs. Reductively simplifying the central bank's professed objective, as many foreign central banks have done, makes policy more opaque and less democratically legitimate. At its worst, it's trade-off denialism. Instit institutions like the Bank of Canada and the European Central Bank have a single mandate for to target inflation.
▶ 0:38:01In practice, they inevitably and often belatedly inject discretionary concern for labor output and financial market outcomes. These concerns are inevitable because the process by which central banks achieve lower inflation runs through adverse risks and costs. A single mandate does no good if it merely encourages central bankers to navigate trade-offs more opaquely and There are environments where the maximum employment mandate proved very helpful for better policym. In the middle of 2008, CPI was above 5 and a.5%.
▶ 0:38:30The Fed's inflation gauge was above 4%. At the same time, the unemployment rate was snowballing upward and Americans were seeing slower nominal incomes. The dual mandate objectives of stable prices and maximum employment were in conflict. For central banks seeking to take a reductive stance on inflation, especially as single-minded inflation targeters, every unw wanted rise in inflation, reflected a single failing and a single solution. Interest rates needed to be higher.
▶ 0:38:54Look no further than the ECB, which foolishly raised interest rates in 2008 and 2011, only to be forced to reverse course and cut rates belatedly as financial crisis snowballed. The inflation pressures of 2008 and 2011 were very real, but also were not as persistent as the costs imposed on employment and output. The Fed had made many mistakes over the same period, but never blunders of this magnitude. High inflation is not always worth looking through as the 1970s demonstrates. Not every inflationary shock reflects the 1970s.
▶ 0:39:23Not every not nor does it reflect 2008 or 2011. Nuance assessment and trade-offs are needed. An assessment of trade-offs are needed. Congress can do more through legislation and hearings to push the Fed to develop a consistent framework for managing the tensions to the dual mandate posed by supply shocks. Economists from across the political spectrum have highlighted the strengths of targeting nominal income and nominal spending aggregates. They reflect both sides of the dual mandate and come with a strong track record. The case for cuts right now, by the way, depends on maximum employment.
▶ 0:39:52Estimates of August for August PCE, the Fed's inflation gauge are around 2.7%. And if you strip out the volatile prices, it's about 2.85%. Under standard policy rules, the Fed funds rate should be right about where it is. Uh if there is a good reason to lower interest rates further, it must depend on maximum employment man and it should and and a recognition that the sources of elevated inflation are due to temporary acceleration in prices for tariff goods.
▶ 0:40:17If we ignore the role of tariffs and the maximum employment mandate, the implication is darker that inflation is stuck nearly a percentage point above the Fed's 2% target. And if so, the case for hikes is strong and the case for cuts is weaker. The erosion of the Fed's Fed independence need not cause immediate market turmoil to still impose costs. changes in overnight interest rates can merely have a more diminished effect uh on on real long-term interest rates. And we've been seeing some of that right now. 100 basis points of cuts over the past year, 150 basis points of cuts priced in over the next six quarters.
▶ 0:40:47And yet tenure yields are roughly in the same spot. We're also seeing that the dollar is weakening. And with those two things going on, it's worth at least thinking about how erosion of Fed independence might actually be imposing costs even if the stock market looks fine. The Fed is ultimately a creature of Congress, not not the executive branch. The commonly professed interest from Congress in independent monetary policy is a noble one.
▶ 0:41:10Uh and if you look at the design of Congress's struct Congress structured for the Fed, Senate confirmed appointees only gained voting power on on the FOMC in 1935 when they had 14-year staggered terms and the four cause removal protections were included. I think that kind of is quite telling about what Congress intended for the Fed in terms of independence. and I applaud this task force shining a light on spotlight on the objectives and independence of the Fed and would be glad to answer any of your questions.
▶ 0:41:37Thank you very much. We'll now turn to member questions and I've recognized myself for five minutes for questions. Uh Mr. Dubet, should we re-evaluate some of the micro credential authorities given to the Fed in DoddFrank? Is the Fed responsible for too much? I think it's I think at this point uh what are we 15 years past DoddFrank that it's it's time to re-evaluate whether that's the proper function of the Fed.
▶ 0:42:07The idea of macrocredential regulation and evaluating fiscal stability is a good financial stability of the the entire system is a good one. But we have other organizations, other indep.
▶ 0:42:30On that same thing, Mr. Everybody, do the Fed's regulatory and supervisory functions interfere with its ability to be independent when setting monetary The Fed has a lot on its plate and it would be way it would be much better for the Fed if it could so it could focus solely on setting monetary policy alone.
▶ 0:42:54Of course, part of that is supervising the banks that are its members, but so I think we need to make be clear to to to separate its role as a regulator for the banks that are its members and the kind of the macro potential uh analysis that it also has to do.
▶ 0:43:08Dr. Holtz Aken, can you expand on your testimony and talk about the transmission of monetary policy through forward guidance and the Fed's communications and how can the Fed improve in reducing uncertainty for the market participants?
▶ 0:43:25Uh certainly uh the the Fed has a very hard job at the moment. uh it has to convey to market participants uh the future path of uh interest rates and in doing so it has to convey how it will evaluate future trade-offs between inflation and unemployment. It has to convey how it will uh evaluate uh uh the recovery from uh errors in hitting targets on inflation. They're trying to get to the 2% target.
▶ 0:43:55How fast will they do that? How how slowly will they do that? And uh that's an enormous amount of uh future judgment that they have to provide some guidance about and and it's there's no guarantee that the future Fed will agree with that guidance and and thus market participants get wrongfooted quite a bit. One of the reasons that I think moving to a single mandate and particularly a price level mandate has virtues is that uh it doesn't forgive past mistakes.
▶ 0:44:23Market participants know that if they overshoot on inflation, they got to get back to the target. they undershoot, they got to get it back up to the target and there's much more of an anchoring of future expectations and you know anchoring the the yield curve and expectations of future cost of capital is is everything for generating good employment outcomes. So I think it would improve the overall performance.
▶ 0:44:46Continuing with you Dr. Holden, can you talk about why it's important for the Fed to take into account a variety of indicators including labor market conditions and businesses access to credit when setting policy?
▶ 0:45:00Uh certainly I mean the the Fed has to take this enormous $30 trillion economy and and condense it down to condense it down to decisions and guidance about future decisions on interest rates. um there there is no way that they can do better by ignoring information.
▶ 0:45:18So knowing the the status of labor markets including regionally, knowing uh uh conditions in global markets, knowing what other monetary authorities are doing are all important to their mission and they are doing their very best to uh accumulate this information and process it every every meeting.
▶ 0:45:36Mr. Pollock, in my remaining time, the Fed just wrapped up its five-year framework review. Were the policies you were there policies you felt that were left unressed that should have warranted their attention in that review? You've got a minute. Sorry. Go. Sorry, Mr. Chairman. I think absolutely there was something very important left out which was a review of the 2% inflation forever doctrine itself.
▶ 0:46:05Uh the Fed announced that what didn't even come up for review that it was carved in stone as it were. uh that is the very thing I think that the Congress and the Fed uh ought to ought to be thinking about. Are we in this for perpetual inflation or for sound money and long-term stable prices and therefore maximum employment and growth?
▶ 0:46:29Thank you, sir. And I'll yield back the remaining 14 seconds of my time and return and recognize the ranking member of the task force, Mr. Vargas, for five minutes for his questions.
▶ 0:46:39Thank you very much, Mr. Chairman. And again, thank all the witnesses here. I believe that all of you when you spoke, you spoke of the independence of the Fed. Um I think Mr. P, not to put words in your mouth, yours was that it shouldn't be independent of the Congress. But I don't think anyone mentioned that it should not be independent of the president. Does anyone believe that the Fed should not be independent of the president? That in fact the president should be under fear in monetary policy?
▶ 0:47:09Mr. Pollock, go ahead, sir. I can comment, congressman, if you like. I think in fact uh the Fed always exists in a network of presidential power, presidential policy uh and presidential politics. That is a fact. Uh and it's applies to all presidents and all federal reserves. So there's the general sense that
▶ 0:47:31however I'm sorry
▶ 0:47:33but but so yeah I mean I I wouldn't I wouldn't argue about that that I wouldn't argue against you that said that in the general sense of course there's always politics but do you think does anyone think that the president should be able to interfere in the monetary policy itself?
▶ 0:47:49What I have they should the pres should the Fed be independent of the president? Let me give somebody I gave you a chance. Let me go to go ahead sir.
▶ 0:47:59I I I think this is very clear. The the constitutional authority is with the Congress. The Congress has created the Fed to execute on uh that authority to for monetary policy and the Congress gave the president a small role in nominating um people for the board of governors subject to the Senate's confirmation. That's it.
▶ 0:48:20That's that's the limit.
▶ 0:48:21Thank you. It doesn't really make a lot of sense for giving 14-year terms, staggered terms, and to do that. At the same time, look, the FOMC was first created in 1933, and Senate confirmed appointees only came uh voting members in 1935.
▶ 0:48:42doesn't really make sense to have a for um sort of an ability for the president to easily fire those members um if you were picking 14-year terms because then you could just reset the slate anytime there's a new president.
▶ 0:48:53That's right.
▶ 0:48:53And that's really just bad for stable monetary policy, stable interest rates, stable prices if we're going to have that kind of turnover.
▶ 0:49:01Yeah, I think that that's fairly clear. I mean that we've seen that before. I mean, we've seen when the president has interfered. I don't think it's gone well here in the United States. Certainly there's the case with Nixon and I don't think it's gone well across the world. I mean I think we saw it also in in Turkey. I mean I just don't think it works well when you have this short political gain by a president interfering in monetary policy.
▶ 0:49:25um I think it's a bad idea and that's I think what we're seeing today or at least an attempt at that and I made some of the I already read off some of the comments but they also have then the president attempting to fire Lisa Cook illegally I think in fact that's what the courts have decided so far so again I again I'm glad that we don't have great disagreement of that but we do have disagreement on the dual mandate and I think we have to look at that the last minute and 50 seconds the the dual mandates interesting because
▶ 0:49:55I think Mr. Armoth you said it very interestingly that is the only real reason right now justifiably to reduce the interest rate which the president wants is because of what we're seeing in the employment sector. Is that not the case?
▶ 0:50:11Yes. I mean if you're looking for the reason to cut rates that's credible, it's that labor market activity is slowing. Hiring is pretty soft right now. uh employment rates are lower on an age adjusted basis from a year ago. Yes, there's obviously a lot of volatility and revisions in the non-farm payrolls data, but in terms of just pure jobs report and what you see from it, this is some of the slowest job growth we've seen in a jobs report in quite some time outside of recessions.
▶ 0:50:39Um, so we have seen a slow in the labor market that might have some impacts on consumer spending and as a result maybe future inflation. But the real reason if you're going to cut rates right now is not because of inflation. Inflation itself policy rules standard policy rules that conservatives and more liberal form
▶ 0:50:57if you're trying to get it down to zero or to two you wouldn't cut. But you know, the reason I want to say that is because it does seem that my friends on the other side are working against the president in this and that they want to do away with the dual mandate, the employment aspect and yet that is what is justifying the rate cuts and that's what the president So again, and and I'm not going to go through the history because I don't have the time of why the employment mandate is so important, but it's because most people experience
▶ 0:51:27most Americans their livelihood through a job. They don't most of them don't live off of Wall Street. They don't. And that's why it's so important to make sure that there is full employment. With that, I yield back with the second.
▶ 0:51:41Gentleman yields back the balances time. The chair now recognizes the gentleman from Arkansas, Mr. Hill who is also chairman of the full committee on financial services to be recognized for five minutes. Mr. Chairman,
▶ 0:51:53thank you, Mr. Chairman. Thanks for our panel for being here. Thanks for bringing your expertise to the the committee. And I thought I'll start out and I'll take the bait on talking about Fed independence. I've got good panelists and I've got great members to do that with here. Of course, the Fed wasn't when you think about monetary policy was not always independent. It wasn't designed as independent in 1913. It wanted to have a bank regulatory system after 1907.
▶ 0:52:19It wanted to have an elastic currency for the Omaha and prairie populists to get some money from New York spread around in a good way. And you know, I think it worked pretty well. And why did we not have a worried about independent monetary policy in the 1920s, 1930s? Why? Because we were on the gold standard. We didn't have to worry about fiat money setting until the depression hit.
▶ 0:52:42So, but through the 30s and through the 1940s, the Treasury Secretary and the Office of Control of the Currency, they were on the board of the Fed, fully integrated into that, as I say, financial supervisory structure. And only in the Truman administration do we have this modern post-war independence of the Fed from a monetary policy point of view, as we're now no longer on the gold standard. and we want to try to have price stability in a postw World War II very inflationary economy.
▶ 0:53:12And you know, we've kind of lived with that ever since. Um, I'd also argue in the uh, after 30 years of bashing and banging around Hubert Humphrey trying to modify the Employment Act of 1946, wanted to get Soviet style central planning into government. He argued for it for six years.
▶ 0:53:35I want five-year Soviet planning type planning where we have employment goals and inflation goals and we want the federal government and the Fed to work handinand glove to plan the American economy. Congress thought that was kind of wacko but he died and so Mural Humphrey had the power of widow and they passed the 1976 and 1977 acts.
▶ 0:54:01Humphrey Hawkins and this Fed so-called dual mandate, which is really not a dual mandate. Actually, in the statute, it's a triple mandate. By statute, the Fed has a triple mandate. Price stability, maximum employment, and moderate long-term interest rates. And I think the 10 years I've been in Congress, we've been told the Fed has a whole bunch of other mandates as as referenced here today. Uh so, let me start with you, Mr. Pollock. You've been involved in the Fed business a long, long time.
▶ 0:54:31Are there other Fed mandates besides those three, those three?
▶ 0:54:39Mr. Chairman, certainly there are. In my testimony, I spell out eight. Of course, the original one, the elastic currency, which they carry out with great energy and in a crisis is handy. uh the a central mandate of all central banks is to finance the government of which they are a part. The Fed also does. They now own $4 trillion of United States Treasury debt.
▶ 0:55:07uh and um and there is of course the regulatory or financial stability uh mandates and the idea that they should make money by by exercising the senorage of the of the government with respect to money. The on the financing the government they this is uh really important because it explains why the Fed should not take monetary orders from the president but from the congress instead in my opinion.
▶ 0:55:36William Mcchznney Martin explained this very clearly one day. He said, 'Well, he and I I I paraphrase, but what he said was the Treasury is the borrower. The Fed is the lender. You can't have the lender be the boss of the borrower. That's fundamentally unsound. And I I think he was right about that.
▶ 0:55:54Thank you. Um uh but the Congress uh has a plenary authority and uh and I think your um your history was was exactly right, Mr. Chairman, that you went through in the in the
▶ 0:56:09Thank you, Dr. P. Let me cut you off just because of my time. We we could talk all day, the two of us, on this
▶ 0:56:14Yes, we could. I'm sorry.
▶ 0:56:15And I I agree generally with your thought and I agree that Congress is the overseer of the Fed and that the monetary policy should be independent as described here. You know, I do. But I I believe price stability is is the most important issue and I want to turn to you Dr. Holtz and I think it's you know no matter how many mandates not only is it first among equals but it's the only one they can actually do something about. Bingo. So tell me maximum employ. That's the fiscal responsibility the states the taxing power of the Congress. You're the former CBO director.
▶ 0:56:45It's too hard isn't it?
▶ 0:56:46Yes. Uh you know we know where inflation comes from. It comes from uh the monetary policy and they can control inflation and because they can do that they even set a target for it. He might not like it but but they did.
▶ 0:56:57Please expand on that.
▶ 0:56:58There's no target for employment because they can't control right and that's what the decision was in the 70s. I yield back but I hope both of you will extend your remarks and answer my questions. Thank you. Yield back.
▶ 0:57:08Chairman yields back. The chair now recognizes the gentleman from Illinois, Mr. Casten, uh for five minutes.
▶ 0:57:15Thank you, Mr. Chair. And I must say I hope my friend from Arkansas isn't suggesting that the lesson of the last century when the US dollar became the world's reserve currency and compared to the rest of the world's currencies has been a remarkable store of value is that we should return to the gold standard in the fiscal policies of the 19th century. I don't think that's what you meant but um that was weird. Um I want to just echo what Mr. Vargas just said and I I don't want to dwell too much on this but do we all agree that the Fed's inflation target is 2%.
▶ 0:57:46Yes. Do we all agree that inflation is right now above 2%. Yes. Do we all agree that inflation right now is rising? Yes. Do we all agree that unemployment right now is rising? So, there's really no argument to cut rates as the Fed just did, but for rising unemployment. Um, we're gonna have a dual This just seems like a weird day to be talking about uh separating that from uh unemployment.
▶ 0:58:13Anyway, um we've had another weird thing that happened today, which is that uh um Steven Moran was confirmed um to the Fed. And in a paper he wrote last year, he said that he wanted to ban the quote revolving door between the executive branch and the Fed. Now, he's decided that he's not going to leave his role in the executive branch, which I guess means there's no resolving door. It's he's just taken the door off the hinges and it's a wide open door.
▶ 0:58:43Um Mr. Amaranth, um does does having somebody who simultaneously works in the White House and at the Fed increase or decrease the independence of the Fed?
▶ 0:58:55I think it's hard to say decrease. So say increase.
▶ 0:58:57It wasn't meant to be a trick question. I say that either. Um if if you ran a hedge fund, would you like interest rates to be high or low? depends on how the hedge fund is exactly betting on things. But uh
▶ 0:59:10if let's just let's just say you had a long career running a hedge fund that really you made a lot of money thanks to a zer policy of essentially zero interest rate policy from the government and you could uh you could lever up your assets and call it alpha.
▶ 0:59:22I mean I think you have lower interest rates you have more scope for leverage.
▶ 0:59:25if you had a lot of real estate investments would you like interest rates to be higher or low? I think typically speaking, people on the real estate side pay more attention are more interest rate sensitive and probably can do more activity in
▶ 0:59:35because because it seems to me we've got a president who's made a lot of money in real estate and a secretary of the treasurer who's made a lot of money as a hedge fund operator and I'm wondering if you are simultaneously working in that White House and at the Fed whose whose interest do you think you're serving? Yeah, I mean I think one of the big issues just to on the on the specific point is there's just an incentive structure where if he can return to his previous office and that itself is kind of a function of
▶ 1:00:00the president's preference to bring him back kind of if he wants to get his old job back there will be to align with the president pretty soon.
▶ 1:00:08Okay. And and how about if you if you fire the head of the the Bureau of Labor Statistics, who's founded on a mission to fearlessly publish facts without regard to the influence those facts may have, and you replace that with someone who was storming the capital on January 6th. Do you think that helps uh BLS integrity and making sure that people can trust
▶ 1:00:31It does. It does not help at all. Dr. Holtik, I want to thank you for your service at the CBO. Um, all of us appreciate what the CBO has done. Would you agree that accurate and impartial budgetary analyses help us do our job better here in Congress?
▶ 1:00:47Yes, I do.
▶ 1:00:48Do you think the partisan attacks on the CBO help or hinder our ability to make for evidence-based policym?
▶ 1:00:55Uh, I think the good news is that for a long long time the CBO has ignored all partisan attacks on its work and it does its work as well as it can.
▶ 1:01:02Okay. Okay. So, when Trump when Trump refers to the CBO as quote Democratcontrolled and Speaker Johnson says that the CBO's estimates are always off. Does that help or hurt the ability of the CBO to do its job?
▶ 1:01:13Uh, it it does neither. CBO does its job. People say things about it all the time, I assure you.
▶ 1:01:18Okay. Well, that's good to know. Um, so when the when the CBO director just recently said that the Trump's tariffs have pushed inflation higher, do you think those comments were politically motivated or or he was just trying to express things to the best of his
▶ 1:01:30I think it's the latter. He's done the analysis. Um, and if you raise interest rates, does that cause tariffs to go
▶ 1:01:36Sorry, again, I missed.
▶ 1:01:36If you raise interest rates, does that cause tariffs to go down?
▶ 1:01:40Um, because there's there's been there was another CBO report that said that Trump's tariff and immigration policies are cooling the economy and contributing to inflation.
▶ 1:01:50Uh, you can simultaneously have slower growth and higher inflation. And that's what they found.
▶ 1:01:55Well, I would like us to be in a point where we don't have fiscal policy fighting with monetary policy. I would like us to be at a point where we don't have to worry about BLS data as presented by someone who stormed the capital. I would like us to be at a point where we are not saying that just because we don't like the data we're going to chew people out. I would like us to be at a point where we're not saying let's lower interest rates to help out people who have not devested themselves of their assets before getting into public service. And I would like all those things to be nonpartisan someday. I yield back.
▶ 1:02:25Gentleman yields back. The chair now recognizes the gentleman from Indiana, Mr. That's none for five minutes.
▶ 1:02:31Thank you, Mr. Chairman, and I appreciate the witnesses for being here today. I I want to talk just a little bit about the the colloquy between the ranking member and the Democrat uh witness, Mr. Armorath. Uh uh the I think you kind of made the point that for us that the the prices have caused unemployment rates to go up. So again that that's a secondary consequence of higher prices.
▶ 1:03:02I mean let's take it for example the housing industry. You know many Americans have locked themselves into low interest rates and now the h inflation has caused the housing market to to increase put them out of place. Now interest rates have followed they're now higher. who wants to go from a 3% interest rate to a six or 7% interest rate now. So, so, so now we've taken a lot of people out of the in the market to buy, correct?
▶ 1:03:31So, your inventory is lower, which pushes prices higher. So, again, if the Fed would focus on price stability rather than on on uh labor numbers, that would take care of itself because right now, who wants to build a new home? Look at the price of new homes. It's the the interest rates have affected housing. The interest rates have affected auto.
▶ 1:03:56Uh back when you could buy a car and you maybe walk out of the new dealership with a $500 to $600 a month payment with a higher interest rates, you're walking out with a $800, $900 in interest or a monthly payment. So you don't buy the car. So that's that's the dynamics that we have going here. That's just reality. It's not in a textbook all the time. It's just the reality of it. So supply and demand forces are still at work here.
▶ 1:04:23And so to say that they lowered interest rates because of unemployment numbers, Yeah. because supply is dropping because people can't buy. They can't afford. And uh and so we have inflationary costs that have driven prices up faster than what the uh the ability to keep up with at the the labor side in income levels for families to be able to go out and buy those products. Um Mr. Pollock, I'd like to go to you.
▶ 1:04:51Um, if you go back and take a deep look at the political environment of the time, uh, under LBJ, it's hard to ignore the persistent influence of LBJ's Great Society reforms and the idea that the federal government should have its hand in every aspect of the economy. For instance, Hubert Humphrey included a great society style government jobs program in his draft of what would become the Hubert Hubert, I'm sorry, the Humphrey Hawkins Act.
▶ 1:05:17If the Fed didn't hit the unemployment target set by Congress, Humphrey's idea was for the federal government to act as an employer of last resort and create jobs for all who wanted one. That sounds to me like decision driven by bad politics, not just bad economics. And this wasn't just a political decision. It was the wrong decision.
▶ 1:05:37Instead of having the Fed maintain its sole focus on inflation as it had for nearly 60 years which I would also remind the committee that uh central banks across the world have single mandates. European Central Bank, Bank of Japan, Swiss National Bank, Bank of Italy and others only have a single mandate.
▶ 1:05:57Um but uh the creation of the dual mandate injected big government politics into the Fed's decisions and forced it to balance two often competing I guess my my question to you uh Mr. Pollock is how do these conflict with each other and does it complicate the Fed's decision-making and do you think the pressure to avoid job losses influences the Fed's willingness to tackle inflation?
▶ 1:06:28Thank you, Congressman. Uh there are a lot of factors the Fed is trying to uh look at just as Dr. Holtz Seek said and they they do conflict with each other and there's some they can directly um control uh like the amount of money and therefore inflation and some they can't like long-term employment which fundamentally results from technology and productivity improvements.
▶ 1:06:56uh and and the functioning of of competitive markets. Uh I'm I'm glad you uh uh brought up President Johnson. That was a famous conflict between a president and a Fed leading to Lynden Johnson, at least it was reported, physically shoving William Mcchznney Martin around the living room of his ranch while yelling at him and calling him despicable.
▶ 1:07:20That hasn't happened today yet, has it? So the uh the we we can uh look to history for many such conflicts. Um I think in the at the time of the Humphrey Hawkins act there was a belief in the Phillips curve and that you could get more employment just by running inflation up. Uh it's a something as far as I know at least I don't believe it and a lot of people think that's a dead theory.
▶ 1:07:47Uh Paul Vulkar warned us against the temptation of saying just run up inflation a little because you'll get more more employment and the answer is you'll end up getting less employment.
▶ 1:07:58Gentleman's time is expired on that point. The chair now recognizes the gentleoman from Texas, Mr. De La Cruz for 5 minutes.
▶ 1:08:08Thank you so much, Mr. Chairman. I do appreciate you having this important hearing today and thank you to the witnesses for being with us. Um, the Fed's independence is the bedrock of our financial system and throughout modern history, the Fed for the most part has done a good job not giving into outside political pressure. At the end of the day, it is up to the Fed to ensure its independence.
▶ 1:08:36Unfortunately, like some horror movies, the call comes from inside the house. Erosion of Fed independence can happen from within the Fed itself. When the Fed reacts or outside of its congressional dual mandate on its own accord like they have done recently with climate or DEI, the Fed cannot make itself a tool for politicians agenda,
▶ 1:09:07but it can also make grave policy errors, forcing Americans through no fault of their own to pay the price of inflation. And when Americans pay for the price of inflation, they do so not only through their wallets, but also through job insecurity and risk to their mental health.
▶ 1:09:30The simple solution is for the Fed to exercise its own restraint to abstain from getting involved in political issues and to focus only on its congressional mandate. Only then will we have economic and stability in Fed credibility. Mr.
▶ 1:09:53Pollock, is the Fed being viewed politically a more recent phenomena or have there been times in the past when the Fed has gotten involved with things like climate DI or a different issue of the time? Thank you, Congresswoman. I I am not aware of of political issues in the past like DEI and climate.
▶ 1:10:21Those obviously came into the Fed with serious political pressure coming from the federal from the Treasury and the and the White House. Historically, however, as I said, there there is always uh uh the the politics and the uh and the policy of the White House and uh and the and the Congress.
▶ 1:10:43Uh, one example that I might just might mention is in the 1960s the many uh leading Democrats including Senator Proxmier heav he heavily uh uh asked I guess might be a polite word the Fed to buy the bonds of housing agencies of the US government. I think this was a mistake.
▶ 1:11:08Senator Proxmier in his comments even reminded the Fed that that Congress could abolish the Fed if they wanted to, which which is true. I should say which if you wanted to. Uh William McKesny Martin said, and I think he was right, the Fed should not do anything, should not use its monopoly money power to benefit any particular section or parties or interest group.
▶ 1:11:34That to me is bedrock uh uh correct policy that the Fed's monetary policy is a general policy affecting the whole society. It should not be turned into subsidies for any political uh parties in general including as as that that debate was
▶ 1:11:55Thank you. I reclaim my time. U Mr. Holtz Aken. Most people just think of the Fed board, but often it is the local Fed banks that are doing some of these more controversial studies on climate or whatever the topic is. In 2020, the Minianapolis Fed used its own resources to push for an amendment to the Minnesota Constitution on education policy.
▶ 1:12:21Does the Fed have a mechanism by which it can reprim reprimand its regional banks that willingly insert themselves into fiscal and political
▶ 1:12:34Uh so I I will uh say that we should get an expert on uh Fed's legal authorities in to answer that question, not me. My understanding of the situation is that uh number one it uh the the regional feds have are independent are independent to private and they're using their own money but the the board has some general supervisory powers over those regional feds and those may be the place where they could uh do something to the Fed.
▶ 1:12:59I think the larger issue is that the Federal Reserve system uh like the board itself should be cognizant of its activities so as not to endanger its standing as a monetary authority and so I think self-restraint would have been the wiser uh path in that circumstance in the same way
▶ 1:13:19I think my time sir our time is up
▶ 1:13:22lady's time is expired the chair now recognizes a gentleman from Montana Mr. Downing uh for 5 minutes.
▶ 1:13:29Thank you, Mr. Chairman, and uh thank you to the witnesses being here. There's been a lot of discussion as to whether the Federal Reserve has been too slow to cut interest rates recently or whether the Fed was too slow to raise interest rates in response to the inflation crisis caused by the previous administration. So, this hearing is uh particularly important to evaluate whether the Fed's current mandates are appropriate.
▶ 1:13:52You know, there have been, you know, to move on to something there, there have been some calls to include combating climate change and racial disparities into the Fed's mandates. You know, I was happy to see the Fed disbanded its internal climate committees earlier this year because the Fed should not be in that a policymaking body on on on those issues. Uh, I'm going to start with uh Dr. Holtz Aken.
▶ 1:14:14Can you discuss why it's a bad idea for the Fed to devote resources to climate change and racial issues when resources could go to conducting monetary policy and supervision?
▶ 1:14:25It can't be effective as a policy maker in those areas and it's not the authorities the Congress gave it. So, it's it's neither something it should be doing nor something it can do.
▶ 1:14:34Thank you. Very generally, do you find that the central banks of other countries have similar mandates as our Federal Reserve or are there notable differences? Oh, as has as been mentioned, there are uh many central banks around the world that have single mandates, not dual mandates. Uh some of them are uh framed in in terms of hierarchies. We're first going to worry about price stability, then employment. So, there are lots of ways uh to uh frame the the central bank's mission.
▶ 1:15:01Uh the thing that was mentioned at the outset by the chairman is that they all include price stability and that I think should be the paramount objective.
▶ 1:15:07Right. Thank you. Uh moving on, Mr. Dubet in its 2012 consensus statement, the Fed refused to set an employment target um as it did for inflation stating that employment was largely determined by non-monetary factors. If that's the case, doesn't that undermine the purpose of a maximum employment
▶ 1:15:28right? Well, I think that the Fed, we kind of been dancing around it. The tools that it has are very blunt. They're best designed to target the price level. the for the history of the Fed for the most part, stable prices and full employment have not conflicted. The full employment really is set by economic factors and then our fiscal and regulatory policies.
▶ 1:15:52The Fed can then help get us there based on having good and sound monetary policy, but it's really not in their it's just the tools are too blunt. They're not designed to achieve uh they're they're best they're designed best to achieve price stability. Thank you. Uh moving back to Dr. Holten, what happens when the Fed's mandates are in conflict with each other? How how does the Fed prioritize?
▶ 1:16:17It's unclear. And uh that that lack of clarity, I mean, it's going to end up being a discussion by the board uh decision that is uh released and then in in modern times, a chairman who tries to explain how they came to that decision, minutes come out with a lag. So uh it leads to a lot of miscommunication with markets and I think it it impairs the overall performance of monetary
▶ 1:16:43Right. Thank you. Uh thank you all for your uh responses and uh Mr. Chair, I yield the remainder of my time.
▶ 1:16:49Gentleman yields back the remainder of his time. The gentleman from California, Mr. Sherman's also uh banking member of the subcommittee on capital markets is now recognized ranking member I should say. He's now recognized for five This is an unusual hearing. Um, we're considering a bill uh that's been noticed for this hearing to eliminate the dual mandate. We all know that uh Americans want two things.
▶ 1:17:18Stable prices and low inflation on the one hand and lots of jobs where bosses are nice and perhaps generous uh because the number of jobs exceeds the number of workers. Of course, those are in conflict uh with each other as lower interest rates will produce more economic growth and jobs at least in the short term and stable uh and uh st in order to achieve stable prices, you sometimes need higher interest rates that lead to fewer jobs.
▶ 1:17:50Um we don't make it easy for the Fed. We run a giant deficit exacerbated by the one big beautiful bill. And so uh it will be difficult for us to have uh both full employment and price stability.
▶ 1:18:07It's no secret that well you know Democrats criticize the president as not being aerodite and academic but it appears and this is I think a secret that he actually speaks the Turkish language and he's been listening to Erdogan in the original Turkish um both in terms of interfering with the uh the central bank and with attitudes toward democracy and the rule of law.
▶ 1:18:37Um, but it's no secret that the president is not only trying to influence but intimidate uh the Federal Reserve to go with lower interest rates. Yet, the bill before us, brought up by our Republican colleagues would eliminate the dual mandate and push us toward higher interest rates in order to achieve stu uh price stability without worrying about employment. So, I'm worried about jobs.
▶ 1:19:03I'm worried about the jobs of my constituents, but I'm particularly worried about the jobs of Democratic members of Congress. You see, it's our job to obstruct and criticize Donald Trump to work against his objectives.
▶ 1:19:18And when Republicans start doing that, they're taking our uh and the fact that Republicans would be arguing in effect for higher interest rates at a time when the president is uh pushing the other direction I find surprising and um but the dual mandate is something that is not found in the old or new testament nor in the Quran.
▶ 1:19:44And I would argue that we should add a third um element though subordinate to the dual mandate and that is we should look at what the Fed does to reduce the deficit of the United States, the debt of the United States. We're running the largest debt in the history of the universe. Uh and there are two ways the Fed can do that. One is by quantitative easing or building its balance sheet.
▶ 1:20:09It has sometimes produced a profit of over a hundred billion dollars from the federal government and only the Fed could look at a hundred billion dollar profit and say that's an unwanted byproduct of what they're doing. And then second, we have uh lower interest rates will reduce the borrowing cost of the largest debtor in the history of the world. Um if uh well I should ask uh Mr.
▶ 1:20:38uh uh excuse me if I'm mispronouncing this um if we were to go with uh just a sole mandate for price stability what would be the effect on interest rates and jobs
▶ 1:20:52you're going to a single mandate at a time when inflation is a little less than a percentage point above its target that would normally mean keeping interest rates around 4%
▶ 1:21:04even there just to to interrupt we have a 2% target because the Fed has a dual mandate and they recognize that going to lower than 2% would really mess up the unemployment picture. If we just had one mandate for price stability, price stability is 0% inflation. So if we had only one mandate, total price stability, what would that do to our economy?
▶ 1:21:28If if stable prices is interpreted as 0% inflation, uh then you would have to have even tighter policy, right? that would if if the if Congress wishes to legislate a 0% inflation target, that would imply that we have a pretty substantial gap between where inflation is and where inflation as Congress wants it to be. And that would mean tighter monetary policy.
▶ 1:21:49Um if if neutral interest rates are about 3% 3.1% then you're dealing with interest rates that have to be closer to 6% five and a half 6%. I point out the word stable means 0% increase and 0% decrease. I don't think there's any doubt that the 2% target is there only because of a dual mandate. And I yield back. Gentleman yields back.
▶ 1:22:18The chair now recognizes the gentleman from Michigan, Mr. Heisinga, who is also vice chairman of the full committee for five minutes.
▶ 1:22:25Thank you, Chairman Lucas. U I got a lot to cover and I'm going to jump right in. Mr. Paul, good seeing you again. And I'm going to start with you. This past summer, you wrote an article entitled, "Could the Fed stop its huge losses by not paying interest on its deposits from banks?" While you certainly didn't bury the lead uh on that. Uh so at the time of the article, you noted that the Fed's operating losses had reached, as you put it, I believe, a mind-boggling $234 billion.
▶ 1:22:52Can you explain briefly how the Fed got to this point and how they are essentially running a negative balance?
▶ 1:23:00Thank you, Congressman. Uh, of course, the losses keep going. They're up over 240 billion now and rising. They come basically because the Federal Reserve build a balance sheet that looks in important uh measure like a 1980s savings and loan institution. That is to say, they invested extremely long at extremely low rates and they borrowed extremely short at what looked like low rates at the time and became normal rates.
▶ 1:23:304% is a normal short-term rate. 6% is a normal historically speaking interest rate. And the Fed is simply upside down just like the savings and loans uh were. So they have a big negative uh net interest margin, negative net interest income, and hugely negative net profits and negative
▶ 1:23:53Well, um I I'm assuming that banks would not be real happy uh if they if the Fed stopped paying uh on those excessive reserves. But is there a financial risk to the economy because of the Fed's current position? There is a risk to the economy through the deficit because the Fed's losses increase the deficit and increase the government debt which we are uh all all worried about.
▶ 1:24:21Uh if the uh Feds stop paying interest on uh on reserves, of course, the banks would be unhappy. The Fed determines how many reserves there are in the aggregate. In the aggregate, banks must hold the amount of reserves that the Fed creates. uh and that would would be a huge uh loss to the banking system to be sure and would would result uh I I feel quite confident in a credit inflation as they tried to get out of their reserves.
▶ 1:24:52All right, I've got about two and a half minutes. Dr. Holtz Aken, good seeing you again as well. And I understand that uh research has long held that consumers would rather uh have an economy undergo massive unemployment instead of experiencing surging inflation according to some studies. I'm curious if you if you believe that is the case.
▶ 1:25:13But last year, research from the Federal Reserve Board economists also found that Americans are willing to accept higher unemployment if it meant low inflation, suggesting Americans are willing to trade an increase in the unemployment rate by up to 6 or half just a little over half a point of percentage point to lower inflation by one percentage point.
▶ 1:25:36Uh to put it in context, in order to lower Biden inflation from its June 2022 peak of 9% down to 2%, Americans would have to accept an unemployment rate close to 8%. I have a hard time believing that that would be the case, but uh would this be evidence that Americans have uh long prefer the the Fed to prioritize fighting inflation rather than employment? I What's your what's your take on that?
▶ 1:26:03Well, the exact trade-off I I I don't think exists in any polling data, but I think it's clear that people have a tremendous distaste for inflation. It's an in economically destructive phenomenon. And when we reached 9.1% inflation in June of 22, uh the overwhelming unhappiness to the American public was visible to everyone and the Fed uh took steps to reduce it.
▶ 1:26:26It is interesting that in doing so when chairman Pal announced the strategy in Jackson Hole, he made the point that they were going to focus on inflation and exclusively inflation, they were going to turn into a single mandate Fed for that period because there was no way to get back to sustained employment growth without returning inflation to the 2% target. So the whole point of that exercise was not to impose a trade-off on Americans, but to give them better employment and better inflation outcomes.
▶ 1:26:56Do do you think there is an appetite or or a willingness to accept that trade-off?
▶ 1:27:01Uh I I think that the the American public will accept hardship to to for in in the interest of national gains, but the issue for the Fed is how over long periods of time, not for any particular episode, to deliver both price stability and good employment outcomes. And and that's the issue that should be focused on the average performance over long
▶ 1:27:22All right. I appreciate my time spot ready up, Mr. Deb. I'm going to send you a question about housing and and Chicago Fed's district which includes my uh uh my congressional district. So with that, Mr. Chairman, my time's up. I yield.
▶ 1:27:35Gentlemen yields back. The chair now recognizes the gentleman from Kentucky, Mr. Bar, who's also chair of the subcommittee on financial institutions for five minutes.
▶ 1:27:42Thank you. Thank you, Mr. Chairman. Um let me ask u Mr. Holtz Eken uh this question. Um it seems like um in the last six months or eight months the Fed was uh in spending an inordinate amount of time scrutinizing the potential inflationary impact of tariffs.
▶ 1:28:02Um um even if uh tariffs would have you know obviously you know a one-time price increase or maybe an impact on inflation expectations if the Fed is taking the impact of tariffs into account shouldn't the Fed also be taking into account disinflationary fiscal policies at the same time?
▶ 1:28:24uh yes they should be looking at all cost uh shocks positive and negative and their inflationary impacts and I think the important part of that is the the second piece you mentioned the inflation expectations you and I can understand a one time uh increase in the price level the Fed understands that the question is will the American public perceive it that way if inflation expectations remain well anchored you can go past the onetime uh cost shock uh and move
▶ 1:28:51I I I guess um For those of us who think the the Fed has been late in moving on easing here, uh the the point I wanted to make is why why wasn't the Fed also looking at the the fiscal policies that uh put downward pressure on prices such as more energy production, uh tax cuts that lower the cost of doing business, um deregulation which lowers the cost of business?
▶ 1:29:17Um, shouldn't those fiscal policies be uh assessed uh with uh whatever impact tariffs would have?
▶ 1:29:26Yes. I I I can't speak for the Fed and exactly what they were looking at. I I won't pretend to.
▶ 1:29:32Um, in in August, Governor Bowman stated stated, quote, "In terms of risks to achieving our dual mandate, I see that upside risks to price stability have diminished as I gain even greater confidence that tariffs will not present a persistent shock to inflation." uh end quote. Dr. Holsein, do you agree that tariffs uh present a one-time uh price increase uh as opposed to creating this inflation expectation spiral that that chairman Pal feared?
▶ 1:30:01So, I I I'll say it very carefully. I I know they're onetime price increase and I'm not concerned. The question is, will they turn into expectations of higher inflation and we should all hope not?
▶ 1:30:11Yeah. Um, let me let me ask um let me let me ask uh a question of Mr. Dubet. In 2023, the Federal Reserve took its eye off monitoring true risks such as interest rate risk and instead focused on political issues such as climate related financial risks leading to the failure of Silicon Valley Bank. Last Congress, we held multiple hearings and sent numerous letters on the Federal Reserve's participation in the network of the greening of the financial system or NGFS.
▶ 1:30:39This proves this proved to be successful as they've since pulled out of the NGFS recognizing it covered a wide uh quote range of issues that are outside the board's statutory mandate end quote. Yet some of my colleagues and political activists push for climate related financial risks to be a core tenant of Fed actions. Mr. Dubet, how does the de facto addition of extraneous mandates uh risk the Fed's ability to properly act on its dual mandate? It certainly distracts.
▶ 1:31:09There's no doubt about it. The the Fed has enough on its plate trying to keep prices stable and achieve full employment as it is. Adding extra mandates distracts from that job. I'd like to point out again that the tools the Fed has are very blunt. They cannot achieve other other no one's ever shown how that would work or proven that it could work in real life.
▶ 1:31:33So what the Fed can do is very specific and trying to expand it is a is a bad idea because it distracts and because it just isn't able to do other things based on the tools it has.
▶ 1:31:44I think it's a a hard argument to to make that climate change plays a role in in price stability or full employment. Uh final question, Mr. Pollock, um as we discuss movement to potentially a single mandate as opposed to a dual mandate, what would be a better reform?
▶ 1:32:01Would it be just to scrap the dual mandate or the the triple mandate and go to just a single price stability mandate or um uh more of a a a modified uh reform that would say um price stability uh in the context of uh maximum employment.
▶ 1:32:26Congressman, I suggested that the the Congress put should put into the act a sound money mandate in general, making clear that that's the fundamental point. And I do think that would be a good idea because of course uh as my colleague Dr. Holtz Seaggan said, the Fed is going to think about all kinds of things at all times. Uh but that would get the fundamental long-term uh issue, I think, uh uh rightly articulated.
▶ 1:32:57Uh thank you. I yield back.
▶ 1:32:58Gentleman's time is expired. The chair recognizes the gentleman of Wisconsin, Mr. Fitzgerald, for five minutes.
▶ 1:33:05Thank you, Chairman. In June, I discussed with Federal Reserve Chair Powell about how he viewed the economy a few weeks before the 2024 presidential election and how he justified a half percentage point rate cut. In September of 2024, core inflation stagnated above target. And at the time, Chair Paul described the labor market as solid.
▶ 1:33:27He told me, you sat right where you're sitting right now, uh that the Fed wanted to make a statement that the Fed was supportive of the labor market and not just inflation. Uh the economic background back backdrop is nearly identical today. As you know, core inflation was only a tenth of a percentage point higher despite tariff fears relative to September 2024.
▶ 1:33:51His reason not to cut in June or July of this year was due to fear the tariffs would cause runaway inflation. Uh yet the Fed's uh tealbook advises the tariffs are not inflationary uh but rather a one-time price increase especially when inflation expectations have remained consistent with 2% inflation which they have been uh according to the Fed.
▶ 1:34:15Uh yet the Fed chose to wait to cut this time around, but chose to cut by 50 basis points was because the BLS reported that they overstated job growth by over 800,000. No one knew that the BLS overstated job growth again until a couple of weeks ago, but Governor Waller had been warning everyone since July that the labor market had been overstated by a large amount again.
▶ 1:34:43But the Fed chose not to cut in their last meeting in July. Now we have the news as of this But uh this raised serious questions and I said that to the chairman not just on Wall Street but across the country about whether the data truly supported such a move or whether it gave the appearance of influencing political outcomes. But it doesn't appear that there is an inconsistency in application uh of monetary policy decisions. Uh, Mr.
▶ 1:35:13Pollock, is a dual mandate an insufficient framework for the Fed to provide a clear, consistent goalpost and and more predictable framework for policy decisions? Congressman, as I uh as I said in the in my written testimony, I think there should be a mandate, a sound money mandate stating that is the fundamental goal of the Fed because that's something they actually can do.
▶ 1:35:43Uh and and managing employment is not at least in any medium to long term. and um in the sense that you can just get more employment by more inflation which was the old idea of the 1970s when the 1977 and 78 act were passed or in my judgment just wrong.
▶ 1:36:06Very good. Thank you. Uh Dr. Aken, does the Fed dual mandate complicate its ability to make datadriven and apolitical decisions? And in your view, would uh focusing solely on price stability improve predictability and public confidence in monetary policy?
▶ 1:36:24Well, I as I said in my written testimony and earlier, uh I think there's uh tremendous advantages in accountability, transparency, and communication uh under a price stability mandate. Uh and it doesn't mean you're giving up on on unemployment. I mean, I think, you know, the European Central Banks never been accused of not caring about whether Europeans have jobs. They they care a lot, but they have a price stability first and foremost and a secondary consideration of of unemployment.
▶ 1:36:52Uh, so I think that's something that the US should look at.
▶ 1:36:56And Mr. Mr. Dubet, uh, how are small businesses and consumers supposed to make sound investment or spending decisions when the Fed is, uh, continually pivoting between the two mandates that we just discussed?
▶ 1:37:10I think it makes it harder for them to discern the future path of monetary policy. I think the Fed tries to make that as clear as possible for the public, including small businesses, by providing forward guidance. But when the future is uncertain and things can shift and the Fed will have to shift based on those circumstances, it makes it harder for all actors in the economy to plan.
▶ 1:37:31Thank you, gentlemen. Chairman, I yield
▶ 1:37:34Gentleman yields back. The chair now recognizes the gentleman from Nebraska, Mr. Flood, who's also chair of the subcommittee on housing insurance for five minutes.
▶ 1:37:43Thank you, Mr. Chairman. You know, I think it's important to keep in mind the significant and devastating effects inflation has on the American consumer's purchasing power. I think many Americans forgot just how bad inflation could get. From 1983 through 2020, the personal consumption expenditures index never touched 6% year-over-year. As a result of that long period of fairly stable prices, I think some policy makers also forgot just how insidious inflation could be.
▶ 1:38:14As the pandemic began to wind down in 2021, Congress, led by Democrats, put both feet on the gas, doubling down on more spending, more spending, and after an already historic amounts of stimulus that had passed into law in 2020. That spending combined with supply constraints resulting from when the economy was returning to normal after CO 19, combined to create the worst inflation this country has seen in decades. Inflation is a tax on everybody.
▶ 1:38:43It makes everything you buy more expensive. It's a hidden tax on all goods, services that slow erodess the value of Americans paychecks. In light of that experience, I do think it's warranted to have a conversation about the Federal Reserve's efforts to fight inflation in the future. Mr. Dubet and Mr. Holtzen, uh, both of you spoke about the importance of keeping the Federal Reserve focused on fighting inflation in your testimonies.
▶ 1:39:08Do you feel it would make more more complicated to conduct Federal Reserve policy if Congress gave them more mandates say on climate or other items things that they'd have to worry about in addition to the two in the dual mandate that they already have. There's no there's no doubt about it and I'd like to reiterate I said it think said it twice before but they just don't have the ability or tools to do any additional mandates either. So it would both distract and they don't have the ability to achieve any other mandate.
▶ 1:39:42Received. Uh Mr. Pollock, in your testimony, you made the case that the Federal Reserve already has eight mandates, not just the two. And I know you mentioned them earlier in this hearing, but for our benefit, can you list the eight mandates you feel the Fed already has, and what do you think the effect of adding more mandates to the mix would be? Thank you, Congressman.
▶ 1:40:04Well, what the the effect of adding more obviously is to make it more difficult what is already difficult or really uh really really impossible. Let me uh come to my list of the mandates uh here. I think they are to furnish an elastic currency. That's the first line of the original Federal Reserve Act of uh to finance the government that is essential to all central banks.
▶ 1:40:34Um the reason that that government debt is considered so high quality is because the central bank will always buy it if nobody else will. Of course, that will generate inflation uh when when they monetize the deficits.
▶ 1:40:50Uh then we have the famous uh uh and triple uh mandate of the 1977 uh act simultaneously employment uh stable stable prices and I was so glad to hear Congressman Sherman say that it's obvious that stable prices mean zero inflation. I I think that's also uh true.
▶ 1:41:14uh and and a moderate long-term interest rates which always gets uh uh forgotten. Um then um the the Fed also has regulating financial stability. That's actually the second line of the uh original 1913 act. They called it improving regulation but it meant the same thing. Then there is make money for the government.
▶ 1:41:38The Fed is set up to make money for the government by by exploiting their their monopoly currency issuing power, which is a monopoly given to the Fed by the Congress. And finally, they have the mandate to pay for the Consumer Financial Protection Bureau, a mandate we could easily get rid of and
▶ 1:42:02We would like to do that very much. Here's what I'll say as we end here and my time is coming to a close. I truly support an independent Federal Reserve. I think it's part of the magic that makes our financial system the envy of the world and it's worth protecting. I want to ensure that we're all in a good position to risk resist calls to further expand the Fed's scope, injecting more uncertainty into their future actions.
▶ 1:42:26And I also want to make sure that we have sufficient transparency to ensure that Congress and the people can understand why the Fed makes the decisions it makes. With that, thank you, Mr. Chairman. I yield back. Gentleman yields back. He's uh all time is expired. All w all members have had an opportunity to question. I would like to thank all of the witnesses for your testimony today. And without objection, all members will have five legislative days to submit additional written questions for witnesses to the chair.
▶ 1:42:55Questions will be forward to the witnesses for their response. And witnesses, please respond no later than October 22nd, 2025. This hearing is adjourned.