One of the hardest points to make to my fellow conservatives is that Fed policy actually has not been easy over the past four years. Yes, monetary policy has been ad-hoc, unpredictable, and appears to have been hyperactive with its large-scale asset purchases. Despite these actions, the Fed has failed to reduce the elevated demand for liquid assets. This is evident in the seemingly insatiable appetite for treasuries that is keeping yields at historic lows and in the latest Flow of Funds data that shows households are still holding an inordinate share of liquid assets in their portfolios.1 As Bernanke notes, though, the Fed is actually capable of addressing this problem in a systematic, rule-based fashion but has failed to do so. This failure amounts to a passive tightening of monetary policy.
One reason for this failure is the political pressure the GOP has placed on the Fed. Most in the GOP think the Fed has been too easy and want it to do less. Specifically, many in the GOP want to narrow the Fed's mandate to just inflation targeting. Senator Marco Rubio is the latest to push this view. Matt O'brien agrees with Rubio that the Fed's mandate needs to be narrowed, but in a different way:
But Rubio is right that the Fed needs a better, clearer monetary rule nowadays... Imagine the Fed had a single mandate, but not for inflation. Imagine instead the Fed had a single mandate for the total size of the economy, which goes by the unwieldy name of nominal GDP (NGDP). During the Great Moderation, NGDP grew about 5 percent a year, but it's only grown about 2.85 percent a year since 2008. If the Fed had an NGDP target of 5 percent a year, and was supposed to make up for any over-or-undershooting, it would have been aggressively easing the entire time since 2008. It's a dual mandate that doesn't get confused by low inflation and low growth.
O'brien is correct that a NGDP level target is a superior way to narrow the Fed's mandate. Unlike an inflation target, it is not susceptible to misinterpreting supply shocks and systematically accounts for past policy mistakes. NGDP level targeting also increases the transparency of the Fed, makes its actions more predictable, and reduces the need for countercyclical fiscal policy. It is a GOP dream. Republicans should be out in front of this idea, promoting it vigorously. They could start by reading this paper.
1Don't even think of blaming the Fed for the low yields on treasury yields.