House task force opens review of Fed framework; members debate independence, dual mandate and balance-sheet tools

A House Financial Services task force led by Chairman Lucas opened its review of the Federal Reserve's monetary policy framework at a hearing in Washington, where members and expert witnesses disagreed over how much discretion the Fed should have and how its tools affect inflation, markets and households.

Lawmakers said the review is timely because Fed actions shape mortgage rates, wages and inflation expectations. Ranking Member Vargas emphasized preserving the Fed's dual mandate — maximum employment and stable prices — and protecting the central bank's independence from short‑term political pressure. "The Fed's dual mandate was established in 1977," Vargas said, and "maximum employment should not be on the chopping block." He added that Congress must defend the Fed's independence even as it conducts oversight.

Former Federal Reserve official Donald Cone told the panel that independence carries a corresponding responsibility: "With a high degree of policy independence, however, comes responsibility of the Federal Reserve to clearly explain what it is doing and why," he said. Cone and other witnesses urged clearer communication from the Fed and a framework robust to a range of shocks.

Witnesses split on whether the Fed has too much discretion. Norbert J. Michel of the Cato Institute said, "Congress has given the Fed too much to do and too much discretionary authority to carry out those mandates," and argued for a rule‑based approach that narrows discretionary policy. Joseph Wang, whose work focuses on monetary transmission, said that part of the difficulty in oversight is that the Fed itself sets the 2 percent inflation target and its concept of full employment, which complicates external evaluation.

Panel members and witnesses also scrutinized the Fed's balance sheet and regulatory tools. Witnesses noted the Fed's purchases of mortgage‑backed securities during the pandemic and said those purchases allocated credit and contributed to housing price gains; one witness observed that national house prices rose about 20 percent in a year during that period. Several witnesses urged reconsideration of bank capital and liquidity rules, including the supplementary leverage ratio (SLR), arguing that its current calibration discouraged banks from providing liquidity in the Treasury market during stress. "Exempting reserves from the leverage ratio" was cited as an example adjustment that could improve market functioning.

The panel discussed quantitative tightening and the Fed's target for reserve levels. Cone described the Fed's goal as reducing the balance sheet "until reserves are just large enough to stabilize market interest rates" and said market rates so far have shown stability. Members raised the Fed's balance sheet size — testified to be in the multiple trillions of dollars — and asked whether the balance sheet will grow in future crises and how that interacts with long‑term interest rates.

Lawmakers probed emergency lending authority and the trend in Federal Reserve backstops. Witnesses recalled the expanded use of section 13(3) during the COVID shock and Dodd‑Frank revisions, and several urged Congress to consider whether the Fed's lender‑of‑last‑resort role has broadened beyond traditional banking backstops.

Policy interactions with fiscal actions and trade policy drew sustained attention. Several members and witnesses warned that proposed tariffs and large fiscal deficits could raise inflation expectations and complicate the Fed's task. One witness said higher tariffs would "very, very much" raise prices and could feed into inflation expectations; members repeatedly returned to the question of how fiscal policy, tariffs and the Fed's mandate interact.

Housing affordability was a recurring, linked concern. Witnesses and members said higher interest rates and the Fed's pandemic purchases had distributional effects on homebuyers and that local supply constraints remain a primary driver of long‑term affordability problems. Committee members cited that the average age of first‑time buyers has risen into the 30s and asked which policies at the federal and local levels could increase housing supply.

The hearing concluded with lawmakers promising further written questions and future hearings as the task force continues its five‑year review. The panel placed a particular focus on transparency, calibration of regulatory tools like the SLR, limits and scope of emergency lending and clear definitions of objectives the Fed uses in balancing employment and price stability.