Renew the Humphrey-Hawkins Hearings

by James K. Galbraith

As he prepared to assume the chairmanship of the Senate Banking Committee, Senator Phil Gramm told columnist Robert Novak what defined the difference between his approach and that of his predecessor, New York Senator Alfonse D’Amato. "I have probably been more focused on the Fed than Sen. D’Amato," Gramm said. "As chairman I will do a lot more oversight and investigation work than Sen. D’Amato did."

Yet, weeks later, in his first press conference as Committee chairman, Gramm declared that he may soon discontinue regular oversight hearings into the most important Fed activity: the conduct of monetary policy. These hearings were first instituted in 1975. They were mandated by law in the Humphrey-Hawkins Act of 1978, which stipulated that the general objectives of economic policy, including monetary policy, should be "full employment, balanced growth... and reasonable price stability." Humphrey-Hawkins set a semi-annual schedule of hearings and written reports.

As an economist on the staff of the House Banking Committee, I organized the Humphrey-Hawkins hearings for the first six years. They were, at the beginning, quite contentious. Federal Reserve chairmen did not care for probing questions. They did not like having their decisions challenged. And they resisted divulging such information as the Fed’s economic forecasts.

But as time went on, they got used to it. And the hearings almost surely have improved the practice of monetary policy. They had this effect, in part, by raising the profile of the Federal Reserve’s chairman, which makes it necessary that the post be filled by a capable, effective figure.

Over the years, the hearings gained respect and importance. The regular schedule guarantees that the Fed cannot shop for a forum in order to avoid questions from an inconvenient Member. The regular reports reveal much about the central bank's perspectives, priorities and intentions. The consistent format provides outsiders with an opportunity to judge changes in Fed thinking from one report to the next.

In the hands of a skilled Member of Congress, the right to participate in this dialogue can be a powerful tool, since questions can be framed in advance and provoke serious give-and-take. This process enjoys very widespread support. David Jones, Wall Street’s best-known Fed-watcher, "almost fell off my chair" when heard the hearings might end. "I would strongly argue against Sen. Gramm on this issue," said Jones. "The twice-a-year testimonies should be a focal point for the Fed’s political accountability."

Certainly, the testimony of the Fed Chairman always dominates the news after a Humphrey-Hawkins hearing. But the fact that he is required to appear at all makes a deeper point. The Federal Reserve is a creature of Congress. It is subject to the laws of the United States, including those that set goals for economic policy. It is an independent agency to be sure – but only within the terms of autonomy set by Congress. And Congress retains the ultimate power under the Constitution to instruct the Federal Reserve by law or resolution if need be.

In today’s world, many central banks have asserted their independence of their national governments. (The new European central bank, which has no corresponding national government, is an extreme example.) Encouraged by antidemocratic elements from the economics profession, these central banks have declared their sole policy objective to be price stability and have abandoned responsibility for investment, growth, and employment. In this way they have not only arrogated to themselves the right to set goals for monetary policy; they have effectively deprived national governments of the means to pursue other economic goals such as full employment. Chronic high unemployment rates in Europe—rates that would never be tolerated in this country—have been the result.

Senator Gramm maintains that a 1995 law ended the requirement of regular Humphrey-Hawkins reports and hearings. In fact, the Federal Reports Elimination and Sunset Act makes no mention of the Fed or Humphrey-Hawkins among the 32 departments and agencies or the scores of reports – such as those required by the Horse Protection Act of 1970 – that it specifically targets.

According to its bipartisan sponsors, every Senate committee was asked to review and comment on the sunset legislation prior to passage. That the Banking Committee did not ask for Humphrey-Hawkins to be added to the list of reports specifically exempted from the law’s automatic and far-reaching sunset requirements may suggest a defect in these consultations. Or it may reflect Senator D’Amato’s disinterest in the Fed. In any event, the underlying mandates of the Humphrey-Hawkins Act remain in place and the sunset law permits Congress to reauthorize any report deemed necessary for effective oversight.

Fortunately, even if Senator Gramm cops out, the Humphrey-Hawkins hearings will continue. Republican Chairman James Leach of the House Banking Committee has called ending them "unthinkable," and will hold hearings whether or not they are technically required. But it would be a shame to leave the Senate out of the picture, and a diminution of Senator Gramm’s own role. One hopes he will see the light on this issue soon.

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This essay appeared in FOMC Alert, January 1999, and is copyright (c) 1999 by the Financial Markets Center. Permission granted to copy and circulate for non-commercial purposes, so long as this notice and the essay remains intact.