Repeal the Humphrey-Hawkins Act

Repeal the Humphrey-Hawkins Act

The Fed’s Open Market Committee meets today and tomorrow and will not change its Fed funds target rate. Since Stephen Miran is no longer visiting the Board and has gone back to his day job at the Council of Economic Advisors, the vote to hold should be unanimous. At the meeting the dual mandate of full employment versus price stability will be front and center. Of course the president will want a rate cut as the economy is sputtering. But inflation is growing.

Job growth is turning out to be an oxymoron with jobs actually shrinking, so the Fed should lower rates, right? However, inflation is growing putting pressure on the Fed to raise rates. What to do?  It is time to have the Fed ditch its dual mandate of full employment and inflation that was dictated by the Employment Act of 1946.  That act also created the Council of Economic Advisors and the congressional Joint Economic Committee. Congress was unhappy with how the Fed was doing its job and In 1978 Congress passed the Full Employment and Balanced Growth Act also known as the Humphrey-Hawkins Act to amend the Employment Act of 1946. Humphrey-Hawkins (yes that Humphrey) specified explicit unemployment and inflation goals. Within five years, unemployment should not exceed 3 percent for people 20 years or older and inflation should be reduced to 3 percent or less. By 1988, the inflation rate should be zero, provided that pursuing this goal would not interfere with the employment goal. 

Obviously, the Fed has failed to reach and maintain the goals dictated by Humphrey-Hawkins. But the Act is still on the books and essentially the suggestions regarding the employment and inflation goals are simply ignored. The Fed now simply chooses which goal is more politically expedient and seeks to implement policy changes to achieve less pressure from the congress and the president unless those pressures are deemed to lead to more economic troubles. That was the case with this first year of the Trump presidency where the lower rates demanded by the president were deemed to be too inflationary.

But isn’t it time to repeal the Act which has turned the Fed into a political animal when it should be concentrating solely on monetary affairs? I favor doing having the Fed only concern itself with inflation. That is the variable that it has some influence over but not employment where at best the Fed can try to lead the horse to water. Paul Ryan – remember him – tried to get Humphrey-Hawkins repealed to concentrate solely on inflation. Mike Pence and Tennessee’s Bob Coker were senators who were working with Ryan for repeal. 

The dual mandate has been responsible for quantitative easing and the enormous buildup in the Fed’s portfolio that has been so disruptive in financial markets. It has made the Fed an even more political animal as it is mucking around in fiscal rather than only monetary policy. Now the chairman and the Fed governors pretend they can be economic saviors able to rescue workers and business from the consequences of failed fiscal and regulatory policies thereby incurring the wrath of irresponsible politicians who blame the Fed for their own political follies. All this led Alan Greenspan to ask the congress to repeal Humphrey-Hawkins.

Nothing was done post Greenspan especially since Ryan, Coker and Pence left the congress. But the dual mandate has probably done more to damage the reputation of the Fed than any since piece of legislation. If I were Fed chair I would simply ignore the employment statistics and concentrate solely on inflation. I would cite Fed independence and that inflation is the most debilitating economic variable rather than unemployment. Seriously, Jay Powell has shown the Fed’s independence in Trump’s attempts to force the it to lower its Fed funds target rate. Isn’t it about time to really assert Fed’s independence for the benefit of the economy by ditching the dual mandate? What will Kevin Warsh do as chairman? As Bob Coker once said “Monetary policy should not be bipolar.”