Newspaper article St Louis Post-Dispatch (MO)

Fed Should Stick to Fighting Inflation

Newspaper article St Louis Post-Dispatch (MO)

Fed Should Stick to Fighting Inflation

Article excerpt

To put it bluntly, Alan Greenspan is living a lie.

Twice a year, in February and July, the chairman of the Federal Reserve Board goes to Capitol Hill and makes a detailed report on monetary policy, including testimony on how the Fed is helping the economy move toward full employment.

Greenspan knows that the Fed really has no influence over economic growth or jobs in the long run, and precious little influence in the short run. But the Humphrey-Hawkins Act of 1978 requires the Fed to meet growth and jobs targets anyway.

The 1978 law was a high-water mark for politicians who thought they could fine-tune the economy. Although the law contains many specific-sounding targets - the adult unemployment rate was to be under 3 percent by 1983, for example, and inflation was to be zero by 1988 - Humphrey-Hawkins has encouraged the Fed to take a scattershot approach, targeting everything and hitting next to nothing.

Now, Sen. Connie Mack, R-Fla., has introduced a bill that would revise Humphrey-Hawkins and give the Fed a single goal: Fighting inflation.

There's considerable support within the Fed for that idea. Thomas Melzer, president of the St. Louis Federal Reserve Bank, is among those who would make stable prices the Fed's sole objective. He says that even if Congress doesn't change the law, the Fed should make a bold statement about its intent to pursue a near-zero inflation rate.

"You could just say that the only way to meet the employment and output goals over time is by focusing on price stability," Melzer said. His argument is that uncertainty over inflation keeps interest rates higher than they would be in a world of stable prices, and causes people to delay investment decisions.

But Alan Blinder, vice chairman of the Fed, told Reuters News Service last week that he opposes the Mack bill. And Blinder said he thinks the Fed should continue pursuing both stable prices and full employment.

The problem is that the Fed has only one real tool: It controls the level of bank reserves, which affects the amount of money in the economy. "One of the oldest theorems in economics is that a policymaker should pursue no more goals than he has tools to reach them," said Michael Belongia, a professor of economics at the University of Mississippi. …

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