It’s not exactly Keynes vs. Hayek, but in contemporary Washington, a visit by Federal Reserve Board chairman Ben Bernanke to Republican Paul Ryan’s House of Representatives budget committee provides the sort of ideological clash that gets wonks excited.
Mr. Bernanke needs no introduction. Mr. Ryan, who hails from Wisconsin, is the author of a budget proposal that would overhaul the U.S. tax system, dramatically reduce government spending and cut future Medicare costs by introducing health vouchers. Mr. Ryan was a runner-up for Time’s Person of the Year in 2011. The magazine called Mr. Ryan “The Prophet.”
Mr. Ryan, who has a degree in economics and political science, is respectful of Mr. Bernanke, but he’s not fan of the Fed’s policies. He narrows the Fed’s mission to protecting the value of the currency. And in his view, Mr. Bernanke’s Fed is a weak guardian of the dollar. Mr. Ryan, like a good number of House Republicans, thinks zero interest rates and quantitative easing is debasing the value of the greenback and sowing the seeds of future inflation.
The latest exchange between Messrs. Bernanke and Ryan was Thursday on Capitol Hill. Mr. Ryan had questions about the Fed’s new transparency policy. The lawmaker applauded Mr. Bernanke for adding clarity to how the central bank sets policy, including the publication of an inflation target of 2 per cent. However, Mr. Ryan said he lacked confidence in the Fed’s commitment to that policy. That’s because the Fed’s policy statement also makes clear that it will continue to keep a close eye on the unemployment rate.
“I don’t know how else to interpret this as a willingness to tolerate a little more inflation,” Mr. Ryan said.
The question allowed Mr. Bernanke to clarify the Fed’s intentions, which is important, because the public still is getting its head around a central bank that suddenly is extremely open about what it is doing.
Mr. Bernanke assured Mr. Ryan that the Fed is “always trying to bring inflation” back to the 2 per cent target. That can’t be done on a daily, weekly, or even monthly basis, but over a period of time, and that’s the goal, he said.
However, the Fed also has a mandate from Congress to achieve “maximum employment.” It’s not possible for the Fed to set an employment target because too many factors besides monetary policy influence hiring. Fed officials do have a consensus view of what the unemployment rate should be over the longer term, and that serves as a guide. That’s important because the central bank will always try to balance its price stability objective with its employment objective. Normally, the two will be in alignment. But if one of those goals gets out of whack – say, like the unemployment rate is currently – the Fed may opt to adjust the “rate of speed, aggressiveness” at which it attempts to adjust policy, Mr. Bernanke said.
With the unemployment rate at 8.5 per cent and inflation cooling, the Fed is little concerned about price increases for now. Nor will the Fed suddenly shift course the moment annual inflation touches 2 per cent.
Mr. Ryan remained unconvinced, and he surely will continue to argue that the Fed be stripped of its employment mandate to concentrate on price stability alone. Likewise, Mr. Bernanke said the Fed’s track record at controlling inflation is as good as anyone’s, and he noted that the dollar’s value has been “pretty stable.”
Call it a draw. Victory in the latest contest between Mr. Bernanke and Mr. Ryan went to anyone watching the exchange. It was impossible to come away from it without out a sharper understanding of monetary policy.