Time To Amend and Update USA Federal Reserve Act and the Federal Open Market Committee (FOMC)

 November 9, 2024

It was under President Barack Obama in 2012, that the Fed through FOMC formally stated its 2% inflation target as a clear goal for price stability.

Federal Reserve Act does not specifically mandate a 2% inflation rate, the FOMC independently set this 2% inflation target as part of its monetary policy to achieve price stability, which is one of the components of its dual mandate.

The Federal Open Market Committee (FOMC) is a part of the Federal Reserve System, and its activities are ultimately accountable to Congress. Thus, congress did not adhere to the non-delegation doctrine that prevents it from delegating its legislative powers to other branches of government or to administrative agencies. This doctrine is rooted in the separation of powers, which is a core principle in the Constitution.

Congress: Can pass laws to implement the policy for the Federal Reserve and Federal Open Market Committee (FOMC). It does NOT have the legal authority to delegate its legislative powers to the FOMC or The Federal Reserve as per the nondelegation doctrine, in my view.

Oversight: Congress has the authority to amend the Federal Reserve Act, which defines the role and powers of the Federal Reserve, including the FOMC. Therefore, Congress has oversight over the FOMC but cannot directly intervene in its day-to-day operations.

Accountability: The FOMC, like the Federal Reserve System, operates independently within the framework established by Congress. It reports to Congress regularly, especially in terms of its policy decisions and economic outlook.

Annual Reports: The Chair of the Federal Reserve (who also chairs the FOMC) is required to testify before Congress twice a year (typically before the House Financial Services Committee and the Senate Banking, Housing, and Urban Affairs Committee) to provide updates on monetary policy and answer questions from lawmakers.

The President: The FOMC also submits an Annual Report, and the President of the United States appoints the members of the Board of Governors of the Federal Reserve, including the Chairperson and Vice Chairperson.

The FOMC: Is composed of seven members of the Board of Governors and five regional Federal Reserve Bank presidents. While the President can influence the selection of Board members, once appointed, Board members (including the FOMC members) have a 14-year term, which is designed to insulate them from short-term political pressures. The Chairperson serves a 4-year term but can be reappointed.

Federal Reserve's policies: Particularly in terms of keeping interest rates high and aiming for 2% inflation—generates significant revenue for the Federal Reserve itself, which is sometimes returned to the U.S. Treasury. However, there are multiple factors and consequences to consider in this scenario, as the relationship between monetary policy, the Federal Reserve’s earnings, and its effects on taxpayers (both individuals and corporations) is complex.

Breakdown of how this works:

1. Revenue Generation from High Interest Rates:

• Interest on Government Securities: The Federal Reserve generates revenue from the interest it earns on the U.S. Treasury bonds and other government securities it holds. When the Federal Reserve raises interest rates, the government must pay higher interest on its debt, which increases the interest income that the Fed receives from these securities.
• Increased Earnings: As interest rates rise, the Federal Reserve's income from interest payments increases, which leads to higher profits for the Federal Reserve. Some of this profit is then transferred back to the U.S. Treasury. In that sense, the higher interest rates increase revenue for the government (in the form of Fed transfers), but it also means that the cost of servicing government debt is more expensive for taxpayers.

2. Inflation Targeting and Its Impact:

• Inflation Control: The Federal Reserve’s goal of maintaining 2% inflation is part of its dual mandate to promote price stability and maximum employment. By targeting a low and stable inflation rate, or preferably a ZERO inflation rate, the Fed aims to prevent the negative economic effects of both high inflation and deflation, which can harm the economy.
• Corporate Impact: While a 2% inflation policy might stabilize the economy, it may have short-term and long-term negative effects for individuals and corporations. High interest rates, for example, increase the cost of borrowing for businesses, consumers, and even the government, which slows down economic growth and hurts business profitability.
• Higher Corporate Taxes: If businesses face higher interest costs, this reduces their profits, potentially affecting corporate tax revenues. On the flip side, if the Federal Reserve's actions might help maintain a stable economy, it might encourage long-term investment and growth.

3. Impact on Taxpayers:

• Individual Taxpayers: High interest rates make consumer loans, mortgages, and credit cards more expensive for individuals, which means they may have less disposable income. This affects their spending behaviour and overall economic activity, conceivably leading to reduced tax revenues from consumer spending and income.
• Government Debt: The government also faces higher borrowing costs when interest rates rise. The U.S. Treasury must pay more to service the national debt, which increases the tax burden on future generations due to higher interest payments. So, even though the Fed may make higher profits, the public debt grows, and taxpayers ultimately pay the price through increased government spending on interest.

4. Corporate Taxpayers and Borrowing Costs:

• Corporations that rely on debt financing face higher costs when interest rates are high. As borrowing becomes more expensive, companies might reduce investment or pass these costs onto consumers, which could have a ripple effect on the broader economy. This could impact corporate profits and tax revenues.
• Corporate Profitability: High interest rates also reduce corporate profitability in the short term, which leads to lower corporate tax revenues as businesses face higher borrowing costs and may delay expansion or hiring.

5. The Fed's Role in Economic Stability:

• Despite these impacts, the Federal Reserve’s primary role is to ensure economic stability, even if that comes with short-term costs. Zero inflation and low interest rates help fuel growth, but controlling inflation and managing interest rates politically are seen as tools to prevent runaway inflation or economic collapse.
• While higher interest rates generate more revenue for the Fed, the long-term goal is to keep the economy healthy and stable. Without a predictable and controlled economic environment, the risks of volatility, financial crises, and economic downturns become much higher.

Conclusion:

1.      Congress should pass laws to implement the policy proposals for a Zero Inflation Target: Maintaining a stable price level ensures that the purchasing power of money remains constant over time. Money Supply Growth Cap: Limiting money supply growth to 2% above zero inflation provides liquidity without inducing inflation. Interest Rate Cap: Capping interest rates at a maximum of 4% keeps borrowing costs affordable and predictable.

2.      Congress must amend the Federal Reserve Act to reduce the term of FOMC members from the current 14-year term to a 4-year term with the possibility of renewal for a further 4 years only. Maximum term of 8 years in total.

3. Federal Reserve members (including the Board of Governors and FOMC members) and other employees are paid by taxpayer funds as the Federal Reserve is a public institution.

4. The Federal Reserve's policies—particularly in terms of keeping interest rates high and aiming for 2% inflation—generate significant revenue for the Federal Reserve itself.

5. High interest rates and a 2% inflation target result in higher revenue for the Federal Reserve, as it earns more interest on its securities holdings.

6. Fed's policies generate more revenue for itself and the Treasury, the trade-offs involve higher costs for ALL taxpayers due to the increased cost of borrowing and servicing national debt.

7. High interest rates with a 2% inflation target result in higher revenue for the Federal Reserve, as it earns more interest on its securities holdings. However, this comes at the expense of taxpayers, as higher interest payments on government debt and higher borrowing costs for individuals and businesses reduce disposable income and increase the national debt.