With all the bandwidth absorbed by the Miran and Cook dramas, insufficient attention was paid late last week to Secretary Bessent’s Wall Street Journal article laying out a new monetary-policy model. I like it a lot and not just because Mr. Bessent quotes my book. As he says, we need a different monetary policy model, one that the Fed is clearly unable to develop on its own judging by the five years of work that went into the ultra-cautious 2025 fiddles with the 2020 model. Most of what Mr. Bessent wants will make the Fed better at its core mission and a more independent guardian of the public good, overdue reforms that Democrats should support.
What does reform entail? First, the Fed would adhere to its statutory mandate, not the truncated “dual” one recent Fed leadership selects in defense of its legitimacy. Secretary Bessent and Stephen Miran read all the law, not just selected passages, correctly observing that the mandate is a triple-header of maximum employment, price stability, and “moderate long-term interest rates.” Mr. Miran’s testimony cites the 1946 Full Employment Act as one source of this mandate along with the 1978 law. Current law also implores the Fed to act in concert with the federal government to further the “general welfare.” The FRB and FOMC thus have an affirmative, express duty to do all they can to reduce economic inequality, not inadvertently but significantly worsen it as has long been the case. Mr. Bessent seconds this view and I know he means it. The Fed has hoped for a “wealth effect” since Chair Greenspan enunciated it, but this only made the rich richer even as it distracted the central bank from effective inflation control, the most important thing it can do to protect lower-income households.
As the Secretary also says, “Simple and measurable tools aimed at a narrow mandate are the clearest way to deliver better outcomes and safeguard central-bank independence…” The clearest offense against this version of the Fed’s mandate is its giant portfolio. As he says, this created a “de facto backstop for asset owners,” exacerbating economic inequality and exerting undue control over a “centralized” financial market of the Fed’s creation.
A Treasury Secretary might be expected to fall prey to the temptations proffered by a central bank that monetizes the federal deficit. All of them since 2008 have taken the candy until Mr. Bessent. He willingly forgoes the lower cost of Treasury debt enabled by trillions in Fed purchases in favor of freeing up like-kind trillions for the private-sector economy. The Fed’s de facto role as a fiscal arbiter, Mr. Bessent rightly says, leads to economic inequality and creates “a perverse incentive for irresponsibility.”
In his op-ed, the Treasury Secretary generally blasts what he calls the Fed’s “gain of function” model in which the Fed exerts more and more power to control the economy, not just influence it via changes in its open-market operations. As a constitutional scholar recently observed, the more the Fed has “coercive” power over the economy, the more it must be governed by the executive branch. Mr. Bessent does not cite this conclusion, but he rightly says that the Fed is squandering the independence it needs for effective monetary policy by sheltering so much under an umbrella meant in 1913 to shield monetary policy, not de facto fiscal standards, regulatory mandates, and much else housed in the central bank over intervening decades.
Mr. Bessent thus renews his call for an “honest, independent, nonpartisan” review of the U.S. central bank. Whomever Mr. Bessent recommends as the next Fed chair will surely promise to support this, giving the Treasury broad influence over a new approach that the new Fed will then endorse not only because the new chair likely feels he or she has to, but also because anyone named as the new chair will want to. Adhering to the Fed’s full mandate, letting markets function freely unless or until there is a financial crisis, stepping back from undue financial regulation, and strictly enforcing safety-and-soundness standards will restore the Fed’s legitimacy and market credibility, not to mention foster economic equality and shared prosperity. That’s something I think progressives will support along with populists if Washington next year can figure out a way to talk sensibly about anything across party lines.