Defending the Fed’s Independence

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.