Some believe the Federal Reserve has done too much – that two rounds of quantitative easing, the new "Operation Twist," and myriad interventions during the depths of the financial crisis have set the stage for runaway inflation. As evidence, they point to the enormous expansion of bank reserves and the skyrocketing price of gold (at least, until recently).
Others believe Chairman Ben Bernanke and his colleagues have done too little and that monetary policy remains too tight. They point to the 15 million Americans who are looking for work and the millions more who have dropped out of the labor force. Even more troubling, almost half of the unemployed have been without work for six months or more, something Mr. Bernanke rightly labeled a "national crisis."
The Fed's mandate is to strike a balance between these concerns – to pursue full employment and stable prices. That's a difficult task, especially when the US is struggling to recover from the worst financial shock since the Great Depression.
So the Fed has been receiving a great deal of advice, mostly unsolicited, about what to do. Much of that advice is healthy and constructive. Financial market participants, monetary policy experts, and even economic columnists all bring important insights to the debate. For what it's worth, I think the Fed should continue its efforts to stimulate our moribund economy; unemployment is clearly a bigger threat than inflation.
But I worry when politicians get involved. Lawmakers need to ensure that Fed actions promote the public welfare. It was, after all, created by Congress. That doesn't mean that politicians should meddle in its policymaking.
History shows independent central banks do a much better job of controlling inflation than those that give in to political pressures. When the Fed caved into LBJ's desire for loose money in the 1960s, it set the stage for a decade of high inflation.
Low inflation is not the only benefit of independence. Once they've built a reputation for keeping inflation in check, central banks have greater ability to step in to support a troubled economy.
Unfortunately, a growing number of politicians are leaning on the Fed. Most egregiously, presidential aspirant and Texas Gov. Rick Perry said in August that it would be "almost treasonous" for it to pursue more monetary stimulus. The day before the Fed announced its September policy decisions, House Speaker John Boehner and three other GOP congressional leaders sent a letter discouraging it from "further extraordinary intervention in the U.S. economy...."
On the other side of the aisle, US Rep. Barney Frank (D) of Massachusetts, the ranking member of the House Financial Services Committee, is developing a proposal to strip the regional Federal Reserve Bank presidents of their role in monetary policy. (The policymaking committee has 12 seats, seven filled by Senate-confirmed, presidential appointees – two of which are currently vacant – and five that rotate among the regional banks.) Mr. Frank floated his proposal after three regional presidents voted against further policy easing, so it's widely viewed as an effort to sway those presidents into being more accommodating.
For all its flaws, the Federal Reserve does a better job of evaluating economic conditions and balancing short- and long-term economic goals than our elected leaders ever could. Politicians on both sides of the aisle should temper their impulse to influence what the Fed is doing. In hard times, its independence is more important than ever.
– Donald Marron is director of the Urban-Brookings Tax Policy Center.