I’m not usually one to sign public petitions, but I made an exception today for a key issue: defending the independence of the Federal Reserve.
Like many other economists (here’s the list of signatories, with a day’s lag), I am troubled by the anti-Fed rhetoric emanating from some parts of the Congress. The Fed has taken a remarkable series of actions that deserve close congressional oversight. But that oversight should not endanger the Fed’s fundamental independence in executing monetary policy.
The petition therefore makes three important points about Fed independence:
First, central bank independence has been shown to be essential for controlling inflation. Sooner or later, the Fed will have to scale back its current unprecedented monetary accommodation. When the Federal Reserve judges it time to begin tightening monetary conditions, it must be allowed to do so without interference.
Second, lender of last resort decisions should not be politicized.
Finally, calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery. The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.
Over at the WSJ, David Wessel has a nice piece on the petition.
That we have an entity as powerful as the Federal Reserve headed by people who don’t stand for election strikes many components of “We the People” as a trifle weird.
It certainly raises the burden on the Administration to choose good people and the Congress to vet them carefully before confirming. Somewhat parallel to the Supreme Court.
Is the petition for the Ron Paul Bill asking the Fed. to open up there books for an Audit? If so then I have to disagree with you. I don’t know all the specifics of the bill but any provision requiring the the Fed. to increase transparency and have their books audited sounds good to me. That in the history of the Fed. the books have never been looked at or audited by an outside body seems strange and troubling to me. As well as a failure of congress to properly exercise it’s oversight responsibilies. (Imagine that!!!)
The petition is about a much broader concern — some folks in Congress have raised other ideas that would reduce the Fed’s independence from elected officials. That may seem weird in our system, but history shows that central banking only works when you install good people, give them good incentives, and shield them from politics.