The Corner

The Fed Freaks Out

The FORM (Fed Oversight and Modernization) Act would direct the Federal Reserve to come up with a rule to guide its policies. If it chooses a rule other than the well-known, widely-supported “Taylor rule”–which suggests where the Fed should steer interest rates depending on the inflation rate and the gap between actual national output and a stable-trend level of national output–it would have to explain why it thinks its rule would work better. If it departs from the rule it chose, it would have to explain why.

This all sounds pretty modest, but the Fed is hyperventilating about it. In the Wall Street Journal, Greg Ip tries to back up the Fed’s resistance. The argument is that no policy rule is perfect, changing circumstances can make rules obsolete, and some discretion is inevitable. To take them in reverse order: Since the bill does not seek to eliminate all discretion, its failure to do so is not an argument against it; the bill allows the Fed to change the rule over time, so the possible obsolescence of a rule is not an argument against it either; and the question is whether a more rule-bound Fed is likely to outperform a rule-less Fed, not whether a rule is perfect. And to answer that question you’d have to grapple with the actual record of Fed discretion, which has not been especially good over either the long or medium runs.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.


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