"In a move without precedent in the modern era, Republican congressional leaders... have penned a letter" to the Fed.

The shocking thing here, surely, is that no one ever did it before.  Although the Fed's board of governors are appointed by the President, the Fed is not technically a part of the US Government, but it controls our money supply and -- in important ways -- the dollar itself.

Printing money is a Constitutional function of the Congress, but actually printing money isn't the way that the money supply is manipulated most of the time now; mostly it is done via actions like the Fed's "Quantitative Easing," in which purely notional transactions between banks "reduce" or "expand" the money supply.  The Congress has granted the Fed authority to manipulate the money supply in that way, and so Congress has in a sense delegated its Constitutional duty to the Fed.

Since the Fed's authority is derived from Congress' authority to print money, why wouldn't Congressional leadership send a letter to the Fed telling the Fed what it thinks about the money supply?  It's Congress' authority that is being used here, after all.  Even if we have decided to delegate that authority to an independent board, Congressional leadership surely has a legitimate power to send a letter voicing an opinion as to how Congress' delegate authority should be used.

1 comment:

E Hines said...

I'm not convinced it's all that unprecedented for Congress to attempt to influence Fed behavior. While this particular mechanism may not have been tried before, Congress has frequently railed at Fed moves, and Congress has occasionally attempted to threaten the Fed with loss of its independence, whether directly, or by cutting off its funding. Indeed, there is a move afoot in the current Congress to subject the Fed to routine audits. While the occasional, irregular audit would, on the whole, be useful, the routine nature of audits, as proposed, will assert a measure of Congressional control.

Separately, there are two other ways in which the Fed can influence the money supply: one is direct and coarse; the other is indirect and only influences the practical availability of the money that already exists. Both also take advantage of the multiplier effects of money in the transaction streams.

The coarse technique is to manipulate the reserve requirement for banks. In our fractional reserve banking system, banks must maintain as cash in their vaults (which for this purpose includes on deposit in a Fed bank) a percentage of the value of loans they have outstanding. Lowering the fractional reserve requirement from 20% to 10% doubles the amount of money available to the economy (and raising the requirement from 10% to 20% halves the money).

The indirect way is to manipulate the Fed funds rate (and the discount rate, which is little used today): this makes it more or less expensive for banks to borrow from the Fed or from each other, and so influences the amount of money the banks are willing (as opposed to allowed) to commit to lending.

Eric Hines