How Baseball Illustrates Absurdity of Second-Guessing Fed

Considering congressional attempts to rein in the Federal Reserve Board, new Washington Nationals Manager Dusty Baker should be grateful the House of Representatives has not expanded its jurisdiction to his baseball decisions.

Fed Chair Janet Yellen is not as fortunate. Despite Yellen's aggressive protests, the House still passed the extraordinarily intrusive Fed Oversight Reform and Modernization Act, known as FORM. If enacted, the legislation would generate unprecedented levels of second-guessing of central bank decisions for no clear purpose.

Imagine for a moment that the same magnitude of congressional oversight were extended to the baseball diamond. Baker would be required to state in advance the precise number of pitches and innings pitched he anticipated for his starting pitcher on game day. The same would go for how many balls versus strikes he anticipated.

He would also have to state in advance the intended distribution of fastballs, curveballs, changeups and sliders; how many hits the distribution of pitches would generate; and a breakdown of how outs would be recorded by strikeouts versus groundouts, and so on.

Baker would have to describe the extent to which the actual pitching performance would deviate from his expectations. Not only would he have to provide a written analysis for this deviation, but he would also possibly have to appear in front of the fans sitting in the left-field bleachers to state his case.

Finally, the Nationals' manager would have to project with "mathematical precision" the team's win-loss ratio for the next five years.

A variation of these requirements for the Fed's monetary policy decisions is at the heart of the House bill. But as important a job as the central bank has in setting the nation's economic course, the Fed cannot be expected to operate in such an environment of rigidity.

On the mound, just think how quickly a pitcher's planned sequence can be altered. A sequence is planned beforehand based on results of the past, with particular attention to previous success against specific batters. But fans know the plan might get thrown out if early pitches don't produce the desired outcome. A planned sequence might last only a single pitch if change seems warranted.

How the Fed addresses monetary policy has parallels. Members of the Federal Open Market Committee keep in mind how past policy decisions have affected the economy to achieve the desired results of low inflation and maximum sustainable employment growth. They are aided by extensive modeling of important variables such as the movement of the U.S. dollar against other currencies; factors that influence imports and exports; rapid movement in the global price of oil; and wage inflation pressure in the domestic economy.

Supporters of the House bill contend that it would provide clarity and improved understanding of monetary policy decisions by the general public, based on the premise that a useful but limited policy tool such as the Taylor Rule should be a single benchmark used by the FOMC in its deliberations. They argue this would improve transparency of the Fed.

But this approach is flawed in two important ways. First, adopting a single policy guideline is inadequate guidance for the complexity of the task. Back to the baseball analogy, this narrow approach would be akin to directing a pitcher to attack every batter with a predetermined sequence of high-inside fastballs followed by low-and-away curveballs.

Secondly, under the House bill the misguided requirement that the Fed focus on a single guideline would be magnified by requiring extensive justification for the deviation from the policy directive within 48 hours of any such deviation. A detailed breakdown such as this would obfuscate rather than clarify policy.

The U.S. has enjoyed over 30 years of inflation contained to single digits as a result of our continually improving understanding of monetary policy. Following the most damaging economic crisis in 70 years, our economy has added over two million jobs in the last 12 months. Far from perfect, our nation's monetary policy has contributed to stable and consistent economic performance. It is not in need of major reform.

Mark W. Olson is chairman of Treliant Risk Advisors LLC and can be reached at molson@treliant.com. His former positions include Federal Reserve Board Governor, chairman of the Public Company Accounting Oversight Board, chairman of the American Bankers Association and bank president and CEO.