The U.S. Congress is intensifying its oversight of the Federal Reserve. A new special task force, led by Oklahoma Republican Congressman Frank Lucas, plans to conduct a broad review of how the Fed sets its interest rate decisions, particularly concerning the balance between "controlling inflation" and "maximizing employment." Lucas stated that many lawmakers are concerned about whether the Fed is truly achieving its "dual mandate" in its decision-making process, especially whether price stability should be prioritized over ensuring employment.
The Fed's "dual mandate" began in 1978 to achieve price stability and maximum employment. Currently, the U.S. unemployment rate is about 4%, and inflation has dropped to 2.6%, close to the target. However, following the pandemic, inflation soared to a 40-year high, prompting the Fed to raise rates to curb inflation, despite some market shocks. Lucas hopes to explore potential policy flaws by reviewing the Fed's practices.
In upcoming hearings over the next few months, Lucas will also focus on whether the Fed should rely more on monetary policy rules and reduce its "discretion" to provide markets with more policy certainty. He believes that if the Fed's primary goal is price stability, a rule-based decision process can offer stronger predictability and consistency.
Although modifying the Federal Reserve Act is challenging, Lucas still hopes that this review process will lead to relevant legislative proposals or effective recommendations for the Fed's improvement. He pointed out that the Fed is currently reviewing its operational framework, particularly on how to address price pressures that emerged in 2021 after enhancing its focus on employment in 2020.
Additionally, Lucas specifically mentioned that the Fed's 2020 framework adjustments, although made to address the high unemployment rates brought by the pandemic, also resulted in delayed inflation control measures. Critics argue that when addressing high inflation, the Fed prioritized the labor market, consequently failing to promptly counter the pressure of rising prices.
In the context of the Fed's "flexible average inflation targeting" policy, Arkansas Republican Congressman French Hill stated that the Fed should avoid too many distractions, particularly discussions around climate change and economic inequality, suggesting that these issues should not interfere with its monetary policy formulation.
Although the Fed's responses were deemed appropriate during the early pandemic stages, as the economy recovers, the policies' adaptability and effectiveness have come under increasing scrutiny. The special task force led by Lucas will continue to review the Fed's performance in the current economic environment and consider whether more in-depth adjustments to its policy framework are necessary.
