WASHINGTON - Sen. Connie Mack, R-Fla., said he plans to introduce legislation to make price stability the primary objective of the Federal Reserve Bank's monetary policy.
"If you have to pursue low unemployment, economic growth, and price stability all at the same time, in the long run you could be pursuing policies that are harmful to the economy," Sen. Mack said last week at a meeting of the National Association of Business Economists.
Current law directs the Fed to work toward stability and growth of the economy, a high level of employment, stability in the purchasing power of the dollar, and a balance of transactions with foreign countries.
Monetary policy geared towards price stability would reduce inflation and stabilize interest rates, and in turn create more jobs, Mack said.
Sen. Mack, a member of the Senate Banking Committee, said he will seek hearings on his proposal to amend the 1978 Humphrey-Hawkins Act.
J. Alfred Broaddus, president of the Federal Reserve Bank of Richmond, said Sen. Mack's proposal would give the Fed more power to alleviate a recession by keeping prices stable and fighting off deflation.
"If we had a long-term strategy aimed at price-level stability, we would have much greater flexibility in dealing with that kind of short-run problem than we do now," Mr. Broaddus said at the economists meeting.
He said banks would benefit from increased price stability.
"If I were a community banker I would look at it and say 'It will not affect my business today or tomorrow, but down the road, we won't have the seesaw downswings and upturns that would affect my business.' "
Depositors and investors also could profit from Mack's proposal, said Mike Penzer, vice president and senior economist for Bank of America in San Francisco.
"Deposit rates would be more stable," he said. "For banks that want to avoid the inflation risks, it would stabilize bank earnings and would be good for the bank's stock."
The Republicans who control Congress may be more hospitable to Sen. Mack's proposal than Democrats were in the past.
In the last Congress, Rep. Stephen L. Neal, D-N.C., introduced legislation calling for the Fed to pursue policies that would lead to zero inflation. Although Rep. Neal was chairman of the House Banking subcommittee on domestic monetary policy, the bill never got a serious hearing.