The Fed Should Do One Thing—and One Thing Only

American monetary policy has become illiberal in the most worrying sense of the term: It is hostile to our freedoms. The left struck the first blow, pushing the Federal Reserve beyond its statutory mandate of “full employment, stable prices, and moderate long-term interest rates” to address a host of irrelevant issues, such as climate change and social justice. Now the right is advancing its own agenda. President Trump’s attempted firing of Fed Governor Lisa Cook is clearly an attempt to subordinate the central bank to his will. American families and businesses are in danger of getting crushed by the partisan scrum.

The root of “liberal” means liberty. All our public institutions, including the Fed, are supposed to protect our rights and advance our interests. Unfortunately, monetary policy has long been the purview of an insular technocratic elite, answerable only to itself. But surging populism is not the answer. If our goal is freedom, we need to rethink how the central bank works. Obsessing over whichever political operatives happen to be at the helm is a distraction.

For monetary policy to respect citizens’ freedoms, it must satisfy three conditions. First, it must serve the economy at a general level. The goal is to help both Wall Street and Main Street by establishing the conditions in which markets can create wealth and jobs. Second, it must be predictable. Monetary policy should follow an intelligible rule that any reasonably well-informed observer can understand. Third, it must be impartial. No group or groups should reap disproportionate benefits or bear disproportionate costs as a result of central-bank decisions. When ordinary families get squeezed by rampant inflation while large financial firms reap massive gains from securities appreciation, the Fed has in effect become discriminatory, despite the absence of any biased intent.

Congress could reform the Fed’s mandate. Its goals right now are far too vague. For example, nobody knows how slow inflation must be to qualify as “stable prices.” Because its goals are underspecified, central bankers can pursue their own values and pet projects while claiming to follow the law. In truth, we don’t even need the employment and interest planks. The only way monetary policy can achieve full employment and rational capital prices is by managing the money supply. This directly controls the dollar’s purchasing power and indirectly affects labor and capital markets. Stabilizing the dollar promotes the other goals.

The implication is clear: Congress should limit the Fed’s mandate to pursuing price stability alone. In theory, it can be beneficial to allow monetary policymakers a little leeway because supply shocks (e.g., a global pandemic or war) can cause the dollar’s purchasing power to change for nonmonetary reasons. But in practice, Fed operatives have proven they can’t be trusted with even this much wiggle room. The right rule is zero inflation. Keep the cost of living stable, and fire central bankers who fail to do so.

It’s tempting to think we can fix things by returning the Fed to its previous mandate. This is a false hope. If the old mandate were effective, we wouldn’t have experienced monetary “mission creep” in the first place. We need a mandate that binds. One of liberalism’s wisest teachings is that power always seeks to grow, and that formal safeguards are needed to keep ambitions in check. That applies to economic technocrats with Ph.D.s, too. Constraining the Fed with a no-inflation rule is nothing more than common-sense constitutionalism applied to monetary policy.

The American experiment in ordered liberty owes its success to liberalism. The Founders built upon classical and Christian traditions and incorporated Enlightenment norms into our constitutional order. The result was the freest, wealthiest, and most powerful nation in history. But we risk losing our position if we don’t reaffirm our commitment to basic freedoms. We don’t want a Democratic Fed or a Republican Fed. We want an American Fed.