A Fight over the Fourth Branch of Government?

According to Reuters.com, two influential Republican lawmakers, Senator Bob Corker and Representative Mike Pence, proposed to narrow the Fed’s “Dual Mandates” in its monetary policy this week. In the CNBC interview, Pence believed that the Fed’s recent decision regarding the purchase of $600 billion government bonds by printing money was “no substitute for a sound fiscal policy”, since this monetary stimulus of QE2 would only fuel inflation in the long run. He emphasized the Fed’s failure in curbing the continuous high unemployment rate (around 9.4%) for 18 months. Therefore, the Fed should focus solely on controlling inflation. It is Congress and the President's job to tackle the unemployment by enacting pro-growth policies.

In contrast, Treasury Secretary Timothy Geithner and Federal Reserve Governor Kevin Warsh strongly opposed the move by Republicans, saying that “ it is very important to keep politics out of monetary policy.” Geithner even openly claimed that, “the White House would block any move by Republicans to narrow the Fed’s dual mandate to a single focus on battling inflation.” This ongoing battle between GOPs and Democrats is heating up, which has brought lots of attention to the Fed and could even draw more potential 2012 candidates into the inflation debate.

It is interesting to see that after winning the midterm election, the Republicans are further attacking the Obama Administration on the issues of the Fed’s mandates, which are the pursuit of price stability and full employment. But does Congress have the power to influence the Fed? Created by Congress in 1913, Federal Reserve as the Central Bank of America has the power to conduct the nation's monetary policy, regulate banking institutions, and maintain the stability of the financial system. It is an independent federal agency within the government, also known as “the fourth branch” of government besides the executive, legislative, and judiciary branches in “the Separation of Powers.” However, the Fed is “subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute.” In other words, Congress has the power to change the Fed by passing bills. This is exactly what Pence is doing—bringing a legislation to narrow the Fed’s mission. However, it is unlikely that Pence's bill will pass and become law, since Senate is still controlled by the Democrats, and the president is Barack Obama.