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What Should We Be Doing to the Federal Reserve?

Free Exchange muses on central bank independence.

I haven't done a nose count on the FOMC. But it is pretty clear that right now it has too many inflation hawks on it and not enough unemployment hawks. The only saving grace is that other central banks are worse--some much worse.

In the 1970s the American Congress learned that it did not want to exercise oversight over the Federal Reserve--that opining and trying to influence was a political loser, because mistakes would be made and if you had pushed for the policies that produced them you took part of the blame.

Now it looks as though the Congress may be shifting its ground...

Free Exchange:

A big Fed mess: ALAN BLINDER opens a new Washington Post column with what I believe is the conventional wisdom:

The Federal Reserve's performance in this long-running financial and economic crisis deserves separate grades. For the early crisis period, from the summer of 2007 until a few weeks after the Lehman Brothers failure in mid-September 2008, the Fed's response was uneven. I would question several decisions. But the Fed deserves extremely high marks for its work since then. It has hit the bull's-eye regularly under very trying circumstances.

In academia and in the financial markets, the overwhelming attitude is: Hurrah, and thank goodness, for Ben Bernanke, who gets kudos for his boldness, creativity and smarts.  This is what economists seem to believe—that the Fed totally blew it where the housing bubble and oversight of financial markets, pre-crisis, were concerned, but in terms of shepherding the financial system through the crisis, and the economy through recession, Mr Bernanke and company have done a bang up job. But that doesn't really seem to be true. Any world in which the Fed is twiddling its thumbs while prices are flat-to-falling and unemployment is above 10% is not one where Fed policy is "hit[ting] the bull's-eye"....

An independent central bank is crucial. Political control of monetary policy must inevitably lead to accelerating inflation and long-run economic instability. But at the moment, the American economy could use an increase in expected inflation. And a real threat to Fed independence would almost certainly deliver it, either because markets would anticipate increased political influence on monetary policy ever after, or because the Fed would seek to fend off pressure from Congress by easing further, which amounts to the same thing. But we don't actually want there to be a real threat to Fed independence, because that way uncontrolled inflation lies.

How does one try to influence the Fed while simultaneously keeping it independent?... [I]t does no good for prominent, respected economists to continue heaping praise on a Fed that failed in its mission before the crisis and which is failing in its mission now. Because as unpleasant as the prospect of Congressional intervention in monetary policy is, two more years of high unemployment might well lead to far worse.