The Fed is Nervous, and Maybe That's a Good Thing

Washington (Feb 9)  The club of U.S. central bankers appears jittery, but it’s not because of interest rates, unemployment, or mortgage-backed securities.  It’s because of Congress.

The Fed appears particularly nervous that Congress will pass Rand Paul’s audit bill and some version of the Federal Reserve Accountability and Transparency Act (the FRAT Act).

Alan Blinder, a former vice chair at the Fed, recently took to the pages of the Wall Street Journal to blast the idea of restricting the Fed with, among other things, the FRAT Act.

Richard Fisher and Charles Plosser, presidents of Federal Reserve District Banks in Dallas and Philadelphia, respectively, criticized the audit idea in an interview with The Hill last week.

Plosser noted that the Fed is already subject to limited audits. He also warned that Paul’s audit bill “runs the risk of monetary policy decisions being based on short-term political considerations instead of the longer-term health of the economy.”

Fisher, a bit more animated, queried: “Who in their right mind would ask the Congress of the United States — who can’t cobble together a fiscal policy — to assume control of monetary policy?”

Excellent question.  I could provide a fairly long list, but I’ll stick to one name: Milton Friedman.

Friedman is on record arguing for the Fed to be put under direct control of Treasury or Congress. In a 1984 interview he reiterated his position:

“I said before that either bringing it under the Treasury or putting it under Congress would give you more small mistakes. It would worsen monetary policy from month to month, or even year to year, but it would prevent major disasters. You would not have had the Great Depression; you would not have had the inflationary rollercoaster of the last 20 years.

Just to be clear, he also said:

“So I’m not overly optimistic about what congressional control can do. However, it would be better than what we have now.  As you can see, I am not in favor of the independence of the Federal Reserve. This is a democracy. And I believe that money is too important to leave to [a] central bank, that it is intolerable that a group of nonelected people should have the power to create a major inflation or a major recession. Entirely aside from the economic effects I believe it is not an acceptable political system. To repeat, as a minor change I’d have the Fed made part of the Treasury. As an alternative, it would be better to have the Fed more directly under congressional control.

I think it’s pretty safe to say Friedman was in his right mind.

Source: FORBES