Federal Reserve Reform on the Horizon: Price Stability Act Sparks Debate on Central Bank's Mission

Is a Major Federal Reserve Overhaul Coming?

Potential reforms to the Federal Reserve may be on the horizon as Congress introduces a new bill aimed at reshaping the central bank's mission. Led by House Financial Services Committee Chairman French Hill, House Republicans have introduced the "2025 Price Stability Act," which would end the dual mandate and ensure the Fed primarily focuses on controlling inflation.

"For too long, the Fed has been juggling competing goals," Hill said in a statement. "It's time to return to a clear, singular focus: protecting American families' pocketbooks by taming inflation."

The History of the Dual Mandate

The dual mandate was formally introduced in 1977 through amendments to the 1913 Federal Reserve Act. These amendments aimed to ensure maximum employment and price stability. This broader legislative initiative came as the U.S. economy faced higher unemployment, rising inflation, and volatile GDP growth.

Why the Change Now?

A group of Republican lawmakers argues that the agency's continuously expanding regulatory and supervisory scope over the years is hindering its efforts to stabilize prices and threatening the central bank's independence. Representative Frank Lucas, head of the Monetary Policy, Government Debt Market Resilience, and Economic Prosperity Task Force, said, "Expanding its regulatory reach through irresponsible international agreements or other ill-defined third and fourth missions distracts the Fed from doing the job Congress tasked it with. The Fed’s actions must remain strictly within Congressional intent.”

It remains unclear how much broad support exists in the Senate for reforming the Fed’s dual mandate.

The Fed's Monetary Policy Framework Review

The legislative proposal comes shortly after the Fed completed a review of its monetary policy framework, which touched on the dual mandate. Fed officials agreed in that policy blueprint to return to flexible inflation targeting and abandon the "make-up strategy" that was a key part of the 2020 framework.

Fed Chairman Jerome Powell, speaking at the central bank’s annual Jackson Hole retreat last month, emphasized that "The document continues to explain how we interpret the mandate that Congress has given us and describes the framework that we believe will best promote maximum employment and price stability. We continue to believe that monetary policy must be forward-looking and take into account the lags in its effects on the economy.”

Other Reform Proposals

In recent months, several senior government officials and economic observers have suggested a comprehensive review of the Fed’s operations. Former Treasury Secretary Steven Mnuchin penned an article titled “The Fed’s New ‘Gain of Function’ Monetary Policy”.

Mnuchin harshly criticized the evolution of the Federal Reserve System since the 2008 Global Financial Crisis. Mnuchin argues that the Fed has distorted financial markets, undermined its independence, and created adverse consequences for the economy.

Mnuchin proposed a comprehensive “honest, independent, and non-partisan review” of the entire Federal Reserve System, including monetary and regulatory policy-making, communications, staffing, and research.

Others have also called for a review and reform of the Fed. Most notably is the view of Kevin Warsh, a former Fed governor, who suggested an “institutional change” at the agency.

Warsh suggested a coalition between the Fed and the Treasury, similar to what occurred in March 1951 when the two institutions agreed to liberate the Fed from Treasury control, enabling it to execute monetary policy independently of executive branch interference.

Warsh also proposed that the two institutions be able to communicate their objectives to financial markets clearly and coordinatedly.

Calls for Greater Independence

A Manhattan Institute paper from March 2024, co-authored by current Fed Governor Michelle W. Bowman, presented a series of reform recommendations to bolster independence and recalibrate "the Fed’s governance to ensure that it remains insulated from day-to-day politics."

The paper proposed reforms to term limits, closing the “revolving door” between the executive branch and the Fed, addressing the FOMC's voting structure, and enhancing the “influence and independence” of regional Federal Reserve banks. The paper concluded that, “Only by providing accountability and credible measures of independence can the Fed restore its reputation in the eyes of the public.”

A recent Economist/YouGov poll found that only 45% of Americans trust the way the Fed is handling the U.S. economy, and 33% approve of Powell’s job performance as Fed chair.

Powell indicated at the post-FOMC meeting press conference in September that he was open to the idea of an independent review of the Federal Reserve. He stated, “We’re certainly always open to striving to do better.”

At the September meeting, the Fed delivered its first rate cut of the year. Officials lowered the benchmark federal funds rate by 25 basis points, to a target range of 4.00% to 4.25%. The FOMC, which sets interest rates, will hold its next two-day policy meeting on October 28 and 29.