Five Questions for Congress

Patrick Horan and I have a new piece in US News and World Report.  Here is an excerpt:

Here are the five questions that the Fed needs Congress to clarify:

First, what is the appropriate size of the Fed’s balance sheet? . . .

Second, should the Fed worry about capital losses in the price of its Treasury bond holdings (and possible bankruptcy)? Or should the Fed recognize that a decline in the value of its Treasury bonds is an equal gain for the Treasury, and hence a wash for the consolidated federal government balance sheet? . . .

Third, is negative interest on bank reserves (or “negative IOR”) legal in the United States? Should it be? . . .

Fourth, should the Fed set an inflation target high enough to entirely avoid the zero interest rate problem? If not, does Congress have a preference as to which monetary policy tools it uses when rates are near zero? . . .

Finally, how should fiscal and monetary policy work together? Does Congress want the Fed to “do whatever it takes” to hit its macro targets (such as 2 percent inflation), or would Congress prefer to assist the Fed with fiscal stimulus when more spending is needed?

Right now, the Fed does not know the correct answer to any of these questions. Nor does it know whether Congress has a soft preference for any particular options.

Yesterday I presented these ideas, as well as my proposal for Fed accountability, to Senate staffers on Capitol Hill.

PS.  My plane down to DC on Tuesday was 5 hours late taking off.  That did not happen again yesterday, instead my plane was 5 1/2 hours late.  As an added bonus, I spent 3 1/2 hours sitting on the runway with my knees jammed into the seat in front of me, with no AC, before I was transferred to another plane, which was also late.  On the second plane I was of course the very first person who was disallowed carry on luggage—I should have done Asian-style queuing and gotten ahead of that slow old lady.  This is bad because it was late at night and Boston’s airport has notoriously slow baggage service.  I finally got to my car at nearly midnight, at which point I ran into bumper to bumper traffic.  Seems late at night is a good time to do tunnel repair, as there is no traffic—unless of course you do tunnel repair.

So right now I feel a bit covfefe; hopefully I’ll recover soon.

PPS.  I’ll never be dragged off a plane, but soon they’ll have to drag me on.




23 Responses to “Five Questions for Congress”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    1. June 2017 at 07:01

    I don’t know why anyone would expect congress (a bunch of politicians, few of whom, if any–Phil Gramm and Dick Armey are no longer there–are trained macro-economists) to have better answers to those five questions than The Fed.

    Also, you should have taken the opportunity in your article to explain why interest rates are such a poor tool; i.e. they’re not the ‘price of money.’ That simple fact would do a world of good if it were better understood.

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    1. June 2017 at 07:05

    The Libertarian Himself supports Trump’s decision on the Paris Agreement;

    The President’s instincts are spot on here. He should withdraw the United States from the accords and be prepared to stoutly defend his decision on both political and scientific grounds. Ironically, the best reasons for getting out of the accords are the evident weaknesses in the reasons that a wide range of businesses and environmental groups offer for staying in.

    One constant refrain of both large American corporations and environmental groups is that by withdrawing from the Paris Accords, the United States will suffer a “huge missed opportunity” to work on the cutting-edge technologies of wind and solar energy. But why? At this point, solar and wind energy, as the indefatigable Matt Ridley points out, amount to at most a trivial portion of the global energy supply, less than one percent in total. Indeed, most of that production comes from state-subsidized ventures that could never survive on their own. And while firms race to collect government subsidies to develop so-called cleaner energy, none of their research is likely to solve the intractable problem of how to store wind or solar energy efficiently.

    Further, to label wind and solar as “green” energy simply ignores the substantial environmental costs associated over their life-cycle of development, fabrication, installation, and maintenance. Covering the ground with huge solar panels is a form of thermal pollution; wind turbines emit a low hum injurious to people and are notorious for killing birds; and mining the materials required for the manufacture of each form of energy results in more environmental harm.

  3. Gravatar of Brian W. Brian W.
    1. June 2017 at 07:39

    June 13, 2016 Which Corporations Control The World?

    A surprisingly small number of corporations control massive global market shares. How many of the brands below do you use?

  4. Gravatar of ssumner ssumner
    1. June 2017 at 07:42

    Patrick, Here is what we said:

    “Like the general public, Congress is not well-versed on all of these issues, and in many cases does not even have a coherent opinion. In that case, it is perfectly acceptable to delegate issues to the Fed. Or to call on the Fed to study the matter and issue a report to Congress. But, at the very least, that preference must be made explicit.”

    I did discuss interest rates on Capitol Hill, but our piece in USNews faced a word limit.

  5. Gravatar of tf tf
    1. June 2017 at 10:08

    The issue is not whether or not Congress is informed enough to answer those questions, the issue is that they need to understand that they need to give someone the authority (hopefully the Fed in my opinion) the ability to answer those questions. My guess is right now 90% of them do not honestly understand the questions.

  6. Gravatar of Brian W. Brian W.
    1. June 2017 at 10:55

    Jun 1, 2017 G. Edward Griffin on Trump, Secret Societies, Collectivism, Bitcoin and Taking The Red Pill

    Jeff interviews esteemed returning guest G Edward Griffin, author of the book ‘The Creature From Jekyll Island’ who is hosting the upcoming Red Pill Expo conference in Bozeman, Montana 23-24 June.

  7. Gravatar of Patrick Sullivan Patrick Sullivan
    1. June 2017 at 13:07

    Here’s Epstein’s argument in oral form;

  8. Gravatar of Benjamin Cole Benjamin Cole
    1. June 2017 at 15:38

    Excellent efforts by Scott Sumner.

    Adair Turner probably would have advised Congress on the advantages of money-financed fiscal programs or helicopter drops.

    OT: I was hoping Trump would withdraw from Iraq and Afghanistan; instead we have left Paris.

  9. Gravatar of Major.Freedom Major.Freedom
    1. June 2017 at 15:52

  10. Gravatar of dtoh dtoh
    1. June 2017 at 15:53


    Question 3 – Even if negative IOR are illegal it is doesn’t matter. Price is not the only way to control quantity. There is no legal requirement for the Fed accept deposits or any specific amount of deposits other than RR. The Fed can simply refuse or return deposits if they want to control the level of ER.

    Flying – I flew yesterday as well. I was given a seat in an easy chair and a bottle of Fiji water while they checked me in. Free full body massage while waiting for the flight. Driven to the gate in cart. FA put my bag in the overhead for me. Complimentary Dom Perignon before take off. Flat bed seat with a mattress and silk comforter. Asleep 5 minutes after takeoff. Woken 15 minutes before landing with a gentle tap on the arm and coffee in a china mug.

    Like everything in life, you get what you pay for.

  11. Gravatar of Major.Freedom Major.Freedom
    1. June 2017 at 16:01








  12. Gravatar of Brent Buckner Brent Buckner
    2. June 2017 at 04:38

    I thought that the Fed had pretty much eliminated the possibility of capital losses leading to legal bankruptcy, c.f.

  13. Gravatar of Brian W. Brian W.
    2. June 2017 at 05:07

    July 21, 2011 The Fed Audit

    The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression.

    GAO (Government Accountability Office) report Of the Federal Reserve

  14. Gravatar of ssumner ssumner
    2. June 2017 at 05:31

    dtoh, You said:

    “Flying – I flew yesterday as well. I was given a seat in an easy chair and a bottle of Fiji water while they checked me in. Free full body massage while waiting for the flight. Driven to the gate in cart. FA put my bag in the overhead for me. Complimentary Dom Perignon before take off. Flat bed seat with a mattress and silk comforter. Asleep 5 minutes after takeoff. Woken 15 minutes before landing with a gentle tap on the arm and coffee in a china mug.”

    It’s people like you that make me favor a progressive consumption tax. 🙂

    Seriously, are you sure about the Fed’s ability to reject deposits? Not saying you are wrong, It’s just that I have not seen that option discussed. I suppose banks would then hold cash reserves. That doesn’t refute your point, as in a sense the whole purpose of negative IOR is to try to force people into (costly) cash, which drives the rate on (less costly) T-bills below zero.

  15. Gravatar of dtoh dtoh
    2. June 2017 at 06:40

    I favor a progressive consumption tax too, but it wouldn’t affect business travel.

    No I’m NOT sure….. but that would be my read of the legislation regarding the Fed. Probably hasn’t been discussed because no one bothers to do their homework.

    Also the point of the exercise is not to get banks or the public to hold more cash, it’s to get them to spend more cash. So at the same time you’re reducing ER, you don’t want it to be offset by reduced velocity. The way around that is to put a negative rate of interest on cash by getting the Fed to charge banks for NET withdrawals of cash (or net withdrawals above the rate of targeted NGDP growth). That might require legislation though.

  16. Gravatar of Scott Freelander Scott Freelander
    2. June 2017 at 06:52


    Good luck, of course, but THIS Congress? On the other hand, Democrats aren’t smart on monetary policy either, so may as well start somewhere. I favored more lobbying to politicians last year, so I do favor this.

  17. Gravatar of Vaidas Urba Vaidas Urba
    2. June 2017 at 23:44


    There is no consolidated risk in holding Treasuries assuming they are held until maturity. But what if you have to tighten the monetary policy before Treasuries mature? In that case the Fed has to sell the Treasuries exposing the consolidated government to risk.

    Why is NGDPLT absent in the five questions?

  18. Gravatar of Scott Sumner Scott Sumner
    3. June 2017 at 08:28

    Vaidas, NGDPLT is absent because I see that as a technical issue, not something Congress should decide. Rather Congress should set a broad mandate.

    I don’t follow your other point. If the Fed sells its bonds at a $1 trillion loss, doesn’t the Treasury see an equal gain, as the value of its liabilities falls by $1 trillion?

  19. Gravatar of Vaidas Urba Vaidas Urba
    4. June 2017 at 04:02


    These five questions look quite technical too.

    Until the moment that Fed sells the bonds, they simply do not exist yet from the consolidated perspective. The relevant risk when the Fed sells the bonds is funding risk, or issuance risk. The consolidated government is forced to issue what in effect are new bonds under conditions that are likely to be quite unfavorable.

    On the other hand, if the Fed holds a non-Treasury portfolio, the issuance of government bonds is not concentrated in unfavorable periods, reducing the probability of nightmare scenarios for consolidated government.

  20. Gravatar of rayward rayward
    4. June 2017 at 09:07

    If the 1% flew commercial this wouldn’t be tolerated, but they don’t so it is. Many places around the world are even building separate airports for the 1%. This being the summer season my travels on I-95 are both very dangerous and slow (because the volume of traffic exceeds the capacity of the roadway). Meanwhile, China is building high speed rail to connect China to the countries to the south, all the way to Singapore. Even as America’s transportation system is fast becoming third world, the NYT is reporting today that Trump’s promise to invest in infrastructure was just a campaign slogan and that, in fact, he intends to reduce investment in infrastructure. The lesson here is stay home.

  21. Gravatar of ssumner ssumner
    4. June 2017 at 19:16

    Vaidas, I don’t understand your point. The bonds the Fed sells are not new bonds, they are old bonds that sell at market prices. If that price is lower, because of higher interest rates, it’s a gain for the Treasury equal to the loss for the Fed.

  22. Gravatar of Vaidas Urba Vaidas Urba
    4. June 2017 at 23:18


    From the consolidated government perspective, they are bonds newly issued to the public at the time which is not optimal.

    Consider an alternative scenario. If the Fed had held some other more suitable assets instead, the gain for the Treasury would have been the same, but Fed’s losses would have been smaller.

  23. Gravatar of ssumner ssumner
    7. June 2017 at 05:38

    Vaidas, That’s like saying if I had equal long and short bets on the stock market, then I’d be exposed to stock market risk because of the counterfactual where I was only long, or only short.

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