The House Hits Yellen: FRAT & Taylor Rule

The Federal Reserve Accountability and Transparency Act (F.R.A.T.) is a bill in the House of Representatives that seeks to have the Federal Reserve pursue its policy objectives using a formula advocated by Milton Friedman some 50 years ago.  Although Dr. John Taylor from Stanford University formulated it in a 1993 paper titled ‘Reference Policy Rules’, he basically packaged Friedman’s insight that the Federal Reserve should seek to maintain a steady growth rate of the money supply, maybe 4% or 5% a year, rather than using a failed ideological template of varying the growth rate to influence inflation or unemployment.

What the House seeks to do is destroy the Federal Reserve’s politics of accommodative policy.  Which is actually a good idea.  Want to get the attention of a monolithic bureacratic institution, threaten it!!

For those without a background in macro-prudential tech talk, here’s what Taylor/Friedman accomplished:  the Taylor rule would seek to set federal funds rate at a percentage analogous to GDP, but one that watched the ‘output gap.’  As Volcker taught, prudence not mechanical policy is required.  The achievement that Volcker taught an entire institution is that a ‘policy mix’ replaces any mechanical intervention.

The only problem with FRAT is that the Federal Reserve has not used the federal funds rate as its principal instrument of monetary policy since it hit ZIP (zero interest rate policy) in December 2008.  Its two main instruments have been quantitative easing (debt monetization) and forward guidance.

Oh and by the way, even Dr. Alan Meltzer spoke of how brilliant the Fed was in 2008 as THE leader of last resort immediately before and during the financial meltdown.  A mechanical rule like Taylor would have had disastrous results just when intervention was required.

I have an idea, why don’t all the technocrats in Congress read ‘7 Fat Years’ by Robert Bartley, then they could understand HOW a policy mix is to be fielded.



About William Holland

Systematic Theologian/International Relations
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