The Hill News

On March 8, 2012 Republican Congressman Kevin Brady of Texas proposed the Sound Dollar Act of 2012. The central focus of the legislation is to change Fed from a dual mandate system charged with promoting both maximum employment and price stability, to an institution solely focused on promoting price stability. However, Mr. Brady includes a variety of other interesting and substantive provisions in the legislation. With no illusions about this legislation passing through both chambers of Congress and receiving the Presidential signature of approval, Mr. Brady clearly designed many of these provisions, “to start a thoughtful debate.” So, that debate begins here.

The central tenet of the legislation, to end the dual mandate in favor of a single price stability objective, would bring the Fed in line with most other central banks in the world. However, taking away the explicit mandate to deal with employment, while unemployment remains over 8%, is extremely unli! kely to be popular with constituents. Moreover, the legislative language implies that the Fed should adopt a hard inflation target, as opposed the current soft target, which could have disastrous consequences. While a soft inflation target provides little additional information to the markets, a hard target sets up the central bank to fail. If the Fed misses a hard target, it loses credibility in the markets and the target becomes functionally worthless.

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