Project 2025 Part 24 Federal Reserve
Project 2025 Part 24
Section 4. The Economy
Chapter 24. Federal Reserve
A note for my new readers. If you can’t start with Part 1 of the series, at least read Part 20 to see what powers the project wants to vest in the next conservative President.
A link to the Glossary of Acronyms post is provided at the end of this post.
FEDERAL RESERVE
“The federal government has long made policy regarding the nation’s money on behalf of the people throughtheir elected representatives in Congress.”
“...however, Congress has delegated that responsibility first to the Department of the Treasury and now to the quasi-public Federal Reserve System.”
“The architects of the Federal Reserve believed that a quasi-public clearinghouse acting as lender of last resort would reduce financial instability and end severe recessions.”
“In the decades since the Federal Reserve was created, there has been a down-turn roughly every five years.”
“This monetary dysfunction is related...to...a political system that has demonstrated a history of bailing outprivate firms when they engage in excess speculation.”
“Government can abuse this authority for its own advantage by printing money to finance its operations.”
“This necessitated the original Federal Reserve’s decentralization and political independence.”
“Yet central bank independence is challenged in two additional ways.”
“First...the Federal Reserve responds to...political oversight when faced with challenges.”
“Additionally, political pressure has led the Federal Reserve to use its power to regulate banks to promote politically favorable initiatives including those aligned with environmental, social, and governance (ESG) objectives.”
“...these developments have eroded the Federal Reserve’s economic neutrality.”
“...because of its vastly expanded discretionary powers with respect to monetary and regulatory policy, the Fedlacks both operational effectiveness and political independence.”
“...Congress should limit its mandate to the sole objective of stable money.”
“This chapter provides a number of options aimed at achieving these goals along with the costs and benefits of each policy recommendation.”
“These recommended reforms are divided into two parts,
1) broad institutional changes.
2) changes involving the Federal Reserve’s management of the money supply.”
BROAD RECOMMENDATIONS
“Eliminate the “dual mandate.”
“The Federal Reserve was originally created to “furnish an elastic currency”...so that the supply of credit couldincrease along with the demand for money and bank credit.”
“In the 1970s, the Federal Reserve’s mission was amended to maintain macroeconomic stability following the abandonment of the gold standard.”
“Supporters of this more expansive mandate claim that monetary policy is needed to help the economy avoid or escape recessions.”
“Hence, even if there is a built-in bias toward inflation, that bias is worth it to avoid the pain of economicstagnation.”
“This accommodationist view is wrong.”
“In other words, the dual mandate may inadvertently contribute to recessions rather than fixing them.”
“A far less harmful alternative is to focus the Federal Reserve on protecting the dollar and restraining inflation.”
“Fiscal policy can be more effective if it is timely, targeted, and temporary.”
“...the problem of the dual mandate may worsen with new pressure on the Federal Reserve to include environmental or redistributionist “equity” goals in its policymaking, which will likely enable additional federal spending.”
Limit the Federal Reserve’s lender-of-last-resort function.
“To protect banks that over lend during easy money episodes, the Federal Reserve was assigned a “lender of last resort” (LOLR) function.”
“This amounts to a standing bailout offer and encourages banks and nonbank financial institutions to engage in reckless lending...”
“This function should be limited so that banks and other financial institutions behave more prudently, returning to their traditional role as conservative lenders rather than taking risks that are too large and lead to still anothertaxpayer bailout.”
Wind down the Federal Reserve’s balance sheet.
“There is currently no government oversight of the types of assets that the Federal Reserve purchases.”
“These purchases have two main effects:
1) They encourage federal deficits
2) They support politically favored markets, which include housing and even corporate debt.”
“...this policy subsidizes government debt, starving business borrowing, while rewarding those who buy homes and certain corporations at the expense of the wider public.”
“Federal Reserve balance sheet purchases should be limited by Congress...”
Limit future balance sheet expansions to U.S. Treasuries.
“The Federal Reserve should be prohibited from picking winners and losers among asset classes.”
“Above all, this means limiting Federal Reserve interventions in the mortgage-backed securities market.”
“It also means eliminating Fed interventions in corporate and municipal debt markets.”
“Restricting the Fed’s open market operations to Treasuries has strong economic support.”
“...Fed intervention in longer-term government debt, mortgage- backed securities, and corporate and municipal debt can distort the pricing process.”
“This more closely resembles credit allocation than liquidity provision.”
“The Fed’s mortgage-related activities are a paradigmatic case of what monetary policy should not do.”
“A primary driver of higher costs during the past three years has been the Federal Reserve’s purchases ofmortgage-backed securities (MBS).”
“Since March 2020, the Federal Reserve has driven down mortgage interest rates and fueled a rise in housingcosts by purchasing $1.3 trillion of MBSs from Fannie Mae, Freddie Mac, and Ginnie Mae.”
“The Federal Reserve should be precluded from any future purchases of MBSs and should wind down its holdings either by selling off the assets or by allowing them to mature without replacement.”
Stop paying interest on excess reserves.
“The Federal Reserve should immediately...sell off its balance sheet or simply stop paying interest so that banks instead lend the money.”
MONETARY RULE REFORM OPTIONS
“While the above recommendations would reduce Federal Reserve manipulation...none would limit the inflationary and recessionary cycles caused by the Federal Reserve.”
“For that, major reform of the Federal Reserve’s core activity of manipulating interest rates and money would be needed.”
“A core problem with government control of monetary policy is its exposure to two unavoidable political pressures:
1) pressure to print money to subsidize government
deficits
2) pressure to print money to boost the economy artificially until the next election.”
“...both will always exist with self-interested politicians...”
“...the...remedy is to take the monetary steering wheel out of the Federal Reserve’s hands and return it to the people.”
“This could be done by abolishing the federal role in money altogether...or embracing a strict monetary-policy rule to ward off political meddling.”
“We present these options in decreasing order of effectiveness against inflation and boom-and-bust recessionary cycles.”
Free Banking.
“In free banking, neither interest rates nor the supply of money is controlled by the government.”
“The Federal Reserve is effectively abolished, and the Department of the Treasury largely limits itself to handling the government’s money.”
“Competition would determine the right mix of assets in banks’ portfolios as backing for their liabilities...”
“...any bank that issues more paper than it has assets available would be subject to competitor banks’ presenting its notes for redemption.”
“Reckless banks’ competitors have good incentives to police risk closely lest their own holdings of competitor dollars become worthless.
“...under free banking, the norm is for the dollar’s purchasing power to rise gently over time, reflecting gains ineconomic productivity.”
“This “supply-side deflation” does not cause economic busts.”
“This allows Americans many more ways to protect their savings.”
“...free banking...has massive political hurdles to clear.”
“Transitioning to free banking would require political authorities, including Congress and the President, to coordinate on multiple reforms simultaneously.”
Commodity-Backed Money.
“For most of U.S. history, the dollar was defined in terms of both gold and silver.”
“...restoring a gold standard retains some appeal among monetary reformers who do not wish to go so far as abolishing the Federal Reserve.”
“...commodity-backing the dollar differs from free banking in that the government (via the Fed) maintains both regulatory and bailout functions.”
“The process of commodity backing is very straightforward.”
“Treasury could set the price of a dollar at today’s market price of $2,000 per ounce of gold.”
“This creates a powerful self-policing mechanism.”
“This forces governments to rein in spending and inflation lest their gold reserves become depleted.”
“The mere fact that people could exchange dollars for gold is what acts as the enforcer.”
“...even under a commodity standard, the Federal Reserve can still influence the economy via interest rate orother interventions.”
“Therefore, at best, a commodity standard is not a full solution to returning to free banking.”
“We have good reasons to worry that central banks and the gold standard are fundamentally incompatible...”
K-Percent Rule.
“Under this rule, proposed by Milton Friedman in 1960, the Federal Reserve would create money at a fixed rate—say 3 percent per year.”
“The principal flaw is that unlike commodities, a K-Percent Rule is not fixed by physical costs.
“It could change according to political pressures or random economic fluctuations.”
Inflation-Targeting Rules
“Under inflation targeting, the Federal Reserve chooses a target inflation rate...and then tries to engineer the money supply to achieve that goal.”
The result can be boom-and-bust cycles of inflation and recession driven by disruptive policy manipulations...because the Federal Reserve is liable to political pressure...”
Inflation and Growth–Targeting Rules
“Inflation and growth targeting is a popular proposal for reforming the Federal Reserve.”
“Two of the most prominent versions of inflation and growth targeting are a Taylor Rule and Nominal GDP (NGDP) Targeting.”
“Both offer similar costs and benefits.”
“The Fed’s job is to minimize fluctuations around that trend nominal growth rate.”
“NGDP targeting stabilizes total nominal spending directly.”
“The Taylor Rule does so indirectly, operating through the federal funds rate.”
“NGDP targeting keeps...spending growth on a steady path.”
“If the demand for money (liquidity) rises, the Fed meets it by increasing the money supply, if the demand formoney falls, the Fed responds by reducing the money supply.”
“The Taylor Rule works similarly.”
“It says the Fed should raise its policy rate when inflation and real output growth are above trend and lower itspolicy rate when inflation and real output growth are below trend.”
“Whereas NGDP targeting focuses directly on stable demand as an outcome, the Taylor Rule focuses on the Fed’s more reliable policy levers.”
“The problem with both rules is the knowledge burden they place on central bankers.”
“In theory, this has much to recommend it.”
“In practice, it can be very difficult...”
“There also are political considerations.”
“Either rule likely outperforms a strict inflation target...“
“While NGDP targeting and the Taylor Rule have much to commend them, they might be harder to explain andjustify to the public.”
“Inflation targeting has an intelligibility advantage.”
“Capable elected officials must persuade the public that the advantages of NGDP targeting and the TaylorRule, especially in terms of supporting labor markets, outweigh the disadvantages.”
MINIMUM EFFECTIVE REFORMS
“Because Washington operates on two-year election cycles, any monetary reform must take account of disruption to financial markets and the economy at large.”
“Free banking and commodity-backed money offer economic benefits by limiting government manipulation...”
“...given potential disruption to the financial system, a K-Percent Rule may be a more feasible option.”
“The other rules discussed (inflation targeting, NGDP targeting, and the Taylor Rule) are more complicated but also more flexible.”
“The minimum of effective reforms includes the following:”
1) Eliminate “full employment” from the Fed’s mandate, requiring it to focus on price stability alone.
2) Have elected officials compel the Fed to specify its target range for inflation and inform the public of a concrete intended growth path.
“There should be no more “flexible average inflation targeting,” which amounts to ex post justification for badpolicy.”
3) Focus any regulatory activities on maintaining bank capital adequacy.
“Elected officials must clamp down on the Fed’s incorporation of environmental, social, and governance factorsinto its mandate, including by amending its financial stability mandate.”
4) Curb the Fed’s excessive last-resort lending practices.
“These practices are directly responsible for “too big to fail” and the institutionalization of moral hazard in our financial system.”
5) Appoint a commission to explore the mission of the Federal Reserve, alternatives to the Federal Reserve system, and the nation’s financial regulatory apparatus.
6) Prevent the institution of a central bank digital currency (CBDC).
“A CBDC would provide unprecedented surveillance and potential control of financial transactions without providing added benefits available through existing technologies.”
Thanks for reading.
Bob