The Fed’s lack of clear rules makes it vulnerable to outside pressure. A commitment to price stability could force Congress to confront its own excesses.



America’s fiscal and monetary problems look like two separate crises. They aren’t. Runaway government spending and an unruly Federal Reserve are two sides of the same coin. When Congress spends beyond its means, it creates pressure on the central bank to print money and paper over the debt. When the Fed operates without clear rules, it becomes the silent enabler of fiscal recklessness. Fix one without fixing the other and you haven’t solved anything. That is where we find ourselves today.

As I argued in my first book, the Fed has a rule problem: It doesn’t have one. For decades, monetary policymakers have operated under broad discretionary authority, adjusting interest rates and the money supply based on their judgment about what the economy needs. The results have been disappointing.

The case against discretionary monetary policy runs along two tracks: one about competence and one about legitimacy.

Start with competence. Central bankers face serious information problems. The economy is vast and complex, and the signals it sends are noisy. Policymakers receive data that is incomplete, revised, and often contradictory. By the time the Fed diagnoses a problem and adjusts policy, the underlying conditions may have already changed. Discretion sounds like flexibility. In practice, it often means groping in the dark.

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