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When Congress established the Fed in 1913, it gave it a dual mandate: high employment and price stability. In its nearly 100-year history, the Fed has achieved both objectives only rarely: 1923-1928, a few years in the mid-1950s and early 1960s, and from 1985 to 2004, when the Fed followed the Taylor rule that incorporates Congress's mandate. Those 20 years when the Fed followed the rule were the longest sustained period of stable growth and low inflation in Federal Reserve history.

In "A History of the Federal Reserve," I concluded that the principal mistakes the Fed has made have resulted from giving excessive attention to current events and forecasts of highly uncertain near-term developments. By focusing on the short-term, the Fed neglects the longer-term consequences of its actions. The transcripts of FOMC show that the members are paying little attention to medium- and longer-term consequences. A rule would change that.

A rule prevents the Fed from responding to the cries of the day traders in the market--the ones now screaming about an unlikely deflation to improve their portfolio--and the pressures from politicians anxious to increase their votes. At times like the present, a rule helps the Fed to recognize that current problems are mainly the result of mistaken government policies that create massive uncertainty.

The Fed added more than a trillion dollars of excess reserves to respond to the financial crisis. Most are still available for bank loans. Adding a few hundred billion to the trillion dollars already available would help the bond speculators, but would do little for the economy that banks could not do now.

There is very little that the Fed can do to change the near-term, but it can have important influence on the future. The Fed has sacrificed much of its independence during this crisis by helping the Treasury carry out fiscal policy. Adopting and following a rule, like the Taylor rule, is an effective way to regain independence.

Allan H. Meltzer is a visiting scholar at AEI.

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