The fed and its critics: both ends of the political spectrum take aim.

• Author: Berry, John M.

The conservative Republican chairmen of the House Financial Services and Senate Banking committees continue to press for legislation to curb the Federal Reserve's power to respond to future financial crises. They also want to force the central bank to adopt a rule to govern its monetary policy decisions. Under the rubric of "Fed reform," they thus want to take away some of the key powers the central bank used, first, to keep the United States from falling into a depression in the wake of the financial crisis that began in 2007, and, second, to bolster the slow recovery over the past six years.

Meanwhile, Senator Elizabeth Warren, the Massachusetts Democrat who is at the other end of the conservative-liberal scale, is also pushing legislation that would make lending to the largest banks during a crisis all but impossible. Her goal, she says, is to prevent "backdoor bailouts." Former Fed Chairman Ben S. Bernanke says her bill would mean the central bank would no longer be able to play its fundamental role as the nation's lender of last resort.

The Republican committee chairmen, Senator Richard Shelby of Alabama and Representative Jeb Hensarling of Texas, complain constantly that the Fed has abused its powers and failed to keep Congress and the public informed about what it is doing and what it plans for the future.

"One way our economy could be healthier is for the Federal Reserve to be more predictable in the conduct of monetary policy," Hensarling said just before Fed Chair Janet L. Yellen presented the central bank's semi-annual monetary policy report in July. "During periods of expanded economic growth like the Great Moderation of 1987-2003, the Fed followed a more clearly communicated, understandable, and predictable convention or rule. America prospered."

"Today we're left with so-called 'forward guidance,' which unfortunately remains somewhat amorphous, opaque, and improvisational. Too often, this leads to investors and consumers being lost in a rather hazy mist as they attempt to plan their economic futures and create a healthier economy for themselves and for us all."

This hyperbole is mostly wrong, with Hensarling badly misreading Federal Reserve history. Alan Greenspan was chairman for that entire 1987-2003 period, and under his leadership did not follow any announced rule in making monetary policy decisions. For instance, in the latter half of the 1990s when unemployment fell below 4 percent, Greenspan stood firm against raising interest rates significantly because he became convinced that surging productivity growth would hold inflation at bay. As it turned out, he was correct and the episode convinced many skeptics that under some circumstances low joblessness did not necessarily lead to high inflation. It was also a period in which Greenspan's and the policymaking Federal Open Market Committee's discretion produced a better result than a policy rule would have--though the Fed was criticized for not raising rates quickly enough to burst the bubble in tech stock prices.

A variation on that theme of the Fed not raising rates quickly enough has played out since the crisis-induced recession ended five years ago. After the Fed lowered its target for overnight interest rates effectively to zero in December 2008 and kept it there, Fed critics loudly complained that the policy would soon generate high inflation and demanded a quick increase in rates. Now, almost seven years later, there is still no runaway inflation. Following the policy rule apparently most popular with congressional critics, the Taylor rule formulated by John B. Taylor of Stanford University, would have required the Fed to begin raising rates several years ago.

In other words, it is fair to say that Hensarling and Shelby implicitly have been calling for years for higher interest rates to head off an inflation surge that still hasn't arrived. The origins of this fight, in...