Bernanke Preps for His Barney Frank Showdown

The best of recent research into inflation and monetary policy indicates that the Phillips curve, or the idea that policymakers can reduce unemployment at the cost of higher inflation, no longer holds. In fact, the opposite is true; achieving price stability and the anchoring of long-term inflation expectations lead to maximum sustainable employment. Thus, lower unemployment is a function of price stability, not higher inflation. For policymakers like Frank who came of age politically during the glory days of the Phillips curve, Bernanke's monetary policy is counterintuitive and challenges their own ideological preferences to the core.

The policy choice that Frank and many in Congress would impose on the Fed was one of the primary causes behind the ruinous monetary policy of the late 1960s and 1970s, when inflation eroded the savings and investment of an all Americans. The policy preference of the majority on Capitol Hill is akin to the disco music that shared a similar popularity during the lost monetary era of the 1970s; it is bad, bereft of any sound philosophical foundation and something most rational individuals would soon forget.

Moreover, warning the Fed not to implement any form of inflation targeting suggests a clear misunderstanding of what Bernanke and his cohorts can and intend to accomplish. Inflation targeting is simply a straightforward method of communication between the Fed, the markets and the public that would "target" the rate of inflation over a predefined period of time.

This should be intuitive, as a stable rate of inflation is a necessary precondition for the type of savings, investment and production decisions that permit our market-based economy to provide maximum employment for those who wish to work. The intention of employing such a policy would be not only to make monetary policy more predictable, but to bring our most opaque public institution out into the open and subject to it to more accountability -- not less.

The irony of the looming clash over the modernization of the nation's monetary policy is that the most transparent innovation to come along in central banking over the last few decades is reflexively opposed by the party in power simply for no other reason than to appease the populist economic sentiment currently fashionable in Washington.

Frank's policy preference is inconsistent with the Fed's long-term move toward transparency, price stability and maximum sustainable employment. In fact, it tends support Frank's own decades-long commitment to injecting more sunshine into our public institutions, not less.