There isn’t anything wrong with Humphrey-Hawkins. If you read it, it really isn’t a dual mandate; it’s a single mandate that is pro-growth and is stated in two different ways, in a complete sentence. “[The Federal Reserve] 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.” If following the standard rules of construction, each of the goals must be interpreted so that each part of the sentence is given some meaning.
What it means is that we want stable growth in monetary and credit aggregates so that monetary policy doesn’t kill jobs, cause excess inflation, or wild swings in rates of interest. It means that if the Fed doesn’t provide enough money for smooth functioning of the system, and we experience deflation and high unemployment as a result, as in the crisis of 2008 and through 2010, it needs to make up for it to even out the path of long run growth.
Further, the history behind the entire act and its actual meaning bolsters conservative objectives, as it was meant to coordinate the entire government to not kill jobs and opportunity, in addition to fostering an opportunity society, one that is based on self-sufficiency as a main personal obligation. Monetary policy is not, at least in my opinion, the appropriate means by which to boost or maintain purchasing power, but rather supply-side deflation and strong economic activity are, and the Humphrey-Hawkins amendments to the Federal Reserve Act give us the monetary piece of the puzzle.
There are two sets of interest rates, one is the short term rate the Fed sets, and the other is natural market interest. The Fed can influence natural interest, the rates we pay for loans or are paid on savings, but market forces can overwhelm it, especially during a strong deflationary force, like in 2008-10 when trillions worth of MBS that were part of M2 had their value evaporate over night. The Fed’s rate is reflecting the weakness in the economy and is actually currently too high, even at near zero, given that natural interest is negative. That doesn’t mean that money is easy, it means the economy is very weak, and is why we have flat to shrinking national income.
QE3 is necessary and long overdue. The previous rounds of QE did not seem to improve economic conditions because they were meant only to prevent deflation, which they achieved, not to make up previous, post-crisis bouts of undershooting the inflation target, the massive collapse in nominal aggregates in 2008, or to stabilize markets. In addition, those rounds of QE were not executed with appropriate communications of intentions, and IOR, I believe, is also a factor that has inhibited their efficacy.
I agree with Ben Bernanke that monetary policy is only one piece of the puzzle in getting a robust recovery, except that I believe that it is a very large piece of the puzzle. We still need the Congress and President to enact pro-growth policies, increase competition by lowering the cost of market entry, and lower the cost of doing business across the board to increase competitiveness. Monetary policy cannot do any of those things, and so I look forward to the elections in November when we can change a number the players and see some action on that front.