Humphrey-Hawkins originalist

Published in Grant’s Interest Rate Observer.

Supreme Court nominee Brett Kavanaugh isn’t the only news-making student of original American texts. Alex J. Pollock, distinguished senior fellow at the R Street Institute in Washington, D.C., is fresh from a deep reading of the 1978 Humphrey- Hawkins Act. What it says may surprise you.

It may surprise Jerome H. Powell, who is expected to deliver his semiannual Humphrey-Hawkins testimony (on the 40th anniversary of that oft invoked legislation) on July 17. If past is prologue, the new Fed chairman will advert to the central bank’s so-called dual mandate, i.e., the promotion of “price stability,” which the Fed defines as a 2% rate of inflation, and “full employment,” which the Fed is pleased to leave undefined.

Pollock—and we—have long wondered how stable prices could be if they’re always rising. Congress is not, in fact, the source of a law to command a quintupling in the price level over the course of an 82-year lifespan, which is the clear arithmetic implication of a 2% per annum inflation target. The brain boxes at the Eccles Building and their counterparts at central banks as far away as New Zealand dreamt it up all by themselves.

Never mind by what process of reasoning the Fed settled on 2%. Pollock rather asks, What does the law say?

The Federal Reserve Reform Act of 1977, for one, does not say “price stability,” as Pollock notes: “It does in particular not say ‘a stable rate of inflation.’ It says ‘stable prices.’ Does the term ‘stable prices’ mean perpetual inflation? What did Congress mean by ‘stable prices’ when it put that term into law?”