bank rates

Sound Dollar Act Offers A Glimmer Of Hope To Weary Savers Earning Little Interest

Legislation seeks to curb Fed's influence on interest rates.Savers should take note of the recently introduced Sound Dollar Act of 2012.

This legislation, proposed by U.S. Rep. Kevin Brady (R-Texas), vice chairman of the Joint Economic Committee, and cosponsored by 23 House Republicans, seeks to curb the use (and, some would say, the abuse) of Federal Reserve monetary policy.

Most significantly, it would end the Fed’s “dual mandate,” replacing the current monetary policy goals of “maximum employment, stable prices and moderate long-term interest rates” with a single goal of “long-term price stability.”

The reference to maximum employment in current law has been a main driver of the Fed’s efforts to drive down interest rates since the 2008-09 financial meltdown.

The Fed defends its interest-rate policy, saying it allows banks to offer low-cost loans to everyone from business owners to home buyers.

The idea is that it will encourage companies to expand and hire more workers and families to purchase bigger, nicer homes.

This campaign, of course, has plagued savers, leaving us with terrible yields on our savings accounts and certificates of deposit.

Indeed, the Fed has supported a projected 5-plus years of “zero interest rate policy,” two rounds of “quantitative easing” and “Operation Twist,” the shifting of $400 billion in Fed holdings from short-term to long-term bonds in an effort to drive down longer-term interest rates.

It’s also behind the ongoing threat, at each meeting of the rate-setting Federal Open Market Committee, of further measures to lower yields.

The other major driver of monetary policy has been the committee’s nagging — and, many believe, exaggerated — deflation fears. The Sound Dollar Act’s reference to price stability leaves room for easing here.

The act contains other interesting provisions, including changes in the makeup of the Open Market Committee and requirements that the Fed:

  • Monitor prices of major asset classes and gold and currency values, in addition to the prices of goods and services, to prevent bubbles and protect the dollar;
  • Restrict its balance sheet (except under “unusual and exigent circumstances”) to U.S. Treasury securities and short-term funding transactions; and
  • Clearly articulate its policy of acting as lender of last resort.

Also, one provision, unrelated to monetary policy, would subject funding of the new Consumer Financial Protection Bureau to the congressional appropriations process (seemingly required for Republican-sponsored legislation).

I have no illusions that this bill (which has a proposed Oct. 1, 2012, effective date) will be enacted into law before the next election.

That would be asking too much.

But at least the legislation is something concrete upon which to have an intelligent discussion of monetary policy.

It seems more useful than pledges to fire Ben Bernanke, prosecute him for treason or revert to the gold standard.

I hope the bill will at least make an appearance as an issue in this year’s House, Senate and, yes, even presidential races.

It may be a faint glimmer of hope for savers, but it’s more than we’ve seen for quite a while.

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