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The Federal Reserve's Next Hundred Years

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President Obama ignited a contest over who will be the next Federal Reserve chairman when he hinted in a June television interview that Ben Bernanke would be replaced when his term expires at the end of January. Lost in the current battle of personalities is what really matters—the policies that the next Fed chairman should follow, and a careful appraisal of the institution's capacity to help or harm the American economy.

Thus far the campaign has pitted Janet Yellen, the Fed's vice chairman, against Larry Summers, the "former everything" in recent Democratic administrations. The choice has been portrayed as Ms. Yellen's experience in monetary policy, her collegiality and respect for the institution versus Mr. Summers's brilliance, abrasiveness and partisanship.

Mr. Summers's Democratic backers promote him as the sole person who can successfully manage the wind-down of the Fed's quantitative easing programs and the normalization of interest rates. Many in Ms. Yellen's corner criticize Mr. Summers for promoting policies as secretary of the Treasury (from 1999 to 2001) that helped to inflate the housing bubble whose collapse caused the financial crisis in 2008. The Federal Reserve is the lead regulator of the nation's banks—and Ms. Yellen's backers say that Mr. Summers is compromised as a regulator because he's been a paid consultant to Wall Street financial institutions.

Ms. Yellen has made it clear in speeches that she would continue the Fed's policy of extraordinary quantitative easing probably well beyond the point where even its architect (Mr. Bernanke) might question its usefulness. Mr. Summers has issued contradictory statements on the future of monetary policy at a time when markets are dependent upon clear communication and a clear road map for Fed policy.

The bickering between the Summers and Yellen camps should not distract the country from what should be an opportunity to seriously examine the future direction of Federal Reserve monetary policy. That is the goal of legislation that I introduced earlier this year, the Centennial Monetary Commission Act.

The bill would create a 12-member, bipartisan commission that would objectively review the Fed's performance in terms of output, employment, prices and financial stability over its first 100 years. The commission would also study what legislative mandate the Fed should follow to best promote economic growth and opportunity.

Advocates of different monetary regimes—discretionary policy, inflation-rate-targeting, price-level-targeting, nominal GDP-targeting, a gold standard—would have an open forum in which to make their case based on empirical evidence. After a comprehensive review involving our best monetary economists, the commission would make recommendations to Congress, as was done before the Fed was established.

I believe the best way to grow jobs and the economy is for the Fed to focus on preserving the purchasing power of the dollar, as reflected in the Sound Dollar Act, which I introduced last year. Stanford economist John B. Taylor shares this view of the Fed's ideal policy. However, since 1977 the Fed has operated under a dual mandate: to maintain stable prices and to maximize employment.

Under Paul Volcker and Alan Greenspan, Fed monetary policy focused on achieving price stability with low inflation. Two long, strong expansions were the result. A major policy shift occurred in December 2008, when the Federal Open Market Committee invoked the employment half of the dual mandate. Since then, maximum employment has been used to justify the extraordinary, interventionist actions taken by the Fed, such as quantitative easing.

The Sound Dollar Act would give the Fed a single mandate for price stability, provide for a smooth, orderly selloff of the non-Treasury assets on the Fed's balance sheet, and have the Fed formally articulate its lender-of-last-resort policy for dealing with financial crises, such as in September 2008. The legislation would accelerate the release of FOMC minutes to improve congressional oversight while protecting the Fed's independence. It would liquidate $50 billion of marketable assets in the Exchange Stabilization Fund that Treasury secretaries of both parties have used for unauthorized bailouts (such as Mexico in 1995 and guaranteeing money-market mutual funds in 2008). Finally, to ensure that the FOMC hears voices from the entire economy, all 12 regional Fed presidents would get a permanent seat on the panel.

Nevertheless, I think the country would benefit from a bipartisan forum in which all monetary ideas can be thoughtfully examined to reach a consensus position for U.S. monetary policy. Such a policy consensus is far more important than Beltway political battles over who should head the Fed.

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