The Federal Reserve is an ‘independent’ entity, but it still takes its marching orders from the Congress, and the law.
The modern directive for the Federal Reserve for conducting monetary policy arrived in the Federal Reserve Reform Act of 1977. In language that still exists in federal law, that legislation established objectives in the following terms:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
For good or ill, the Congress told a few people to control the total amount of money and credit for more than 200 million people.
In making that grant of authority, Congress directed the Fed to maintain the “long run growth” of money and credit, in light the economy’s “long run potential.”
Yesterday, in an interview at the Economic Club of Washington D.C., Federal Reserve Board Chairman Jerome Powell was asked if he was worried, at the Fed, about “the enormous amount of debt the Federal Government has.”
Powell’s response included:
"I'm very worried about it. From the Fed's standpoint, we're really looking at a business cycle length: that's our frame of reference. The long-run fiscal, nonsustainability of the U.S. federal government isn't really something that plays into the medium term that is relevant for our policy decisions. It's a long-run issue that we definitely need to face, and ultimately, will have no choice but to face," he added.”
Maybe this is just an Artful Dodger way to avoid getting into the fiscal policy mud.
But Congress told the Fed to be concerned with the long run. So much for the directive to maintain the “long run growth” of money and credit, in light of the economy’s “long run potential.” The Fed has decided that it’s the “medium term,” whatever that means, that is relevant for its policy decisions.
The long-run issue of federal government debt could turn into a medium term issue sooner than later – perhaps even soon.