Fed Independence

Here's George Will on Barney Frank and the Fed:

The Equality Engineer, by George F. Will, Commentary, Washington Post: Barney Frank, the 14-term Massachusetts congressman who chairs the House Financial Services Committee, says ... that Congress should "pay a little more attention" to the seven governors of the Federal Reserve system, all of whom are confirmed by Congress. The Fed, says Frank less mildly, should not be considered "above democracy": "We can debate whether Terri Schiavo's life should be recognized as over" and other fundamental questions of existence, "but God forbid anybody in elected office should talk about whether or not we need a 25-basis-point increase" in interest rates. "Somehow that's sacrosanct. No, it isn't. It's public policy."

The late Sen. William Proxmire, a populist Democrat who represented Wisconsin for 32 years, said that all members of Congress should have written on their bathroom mirrors, so it is the first thing they read each day, this: "The Fed is a creature of Congress." Frank says Congress should not intervene in monetary policy . . . "unless." By monitoring whether the Fed's governors act as they said they would when they were being confirmed, Congress would be "setting the predicate for intervention if they act otherwise."...

I believe that any erosion in independence of the Fed in favor of more legislative or executive branch influence over monetary policy would make us worse off. Yes, the Fed has made mistakes in the past, but those mistakes had the potential to be far worse if policy had been in the hands of politicians. For example, Barney Frank's past statements about the Fed's adoption of an explicit inflation target make me wonder if he fully understands the theoretical underpinnings of inflation targeting. The Fed is taking a very careful, very deliberative approach to the adoption of an inflation target and if they decide to adopt one, it would be a mistake for Congress to block the action, as has been threatened, based upon a faulty understanding of the reasons for the change in policy. In fairness though, Frank has backed off a bit on this point and his more recent statements have shown some progress in understanding the reasons for the adoption of a target, i.e. he is realizing that inflation stability is not a goal in and of itself, it's a means to an end (output and employment stability).

I have no problem at all with people, including legislators, giving their opinion on what monetary policy should be. We should all be free to say what we believe. But it crosses the line to start saying "The Fed is a creature of Congress", that 'Congress should not intervene in monetary policy . . . "unless,"' and that they are "setting the predicate for intervention if they act otherwise." Threatening to take away independence of the Fed is an attempt to influence policy in a particular direction, and it has the potential to undermine the institution. I hope Barney Frank and others will be careful to respect the boundaries between Congress and the Fed. I can imagine situations where it would be appropriate for Congress to step in, but we are not even close to that point and unless and until we get there, the Fed's independence should be respected. Frank did say that his committee has "a larger jurisdiction to talk than to legislate" and I hope he abides by that statement.

One more thing. I have heard a lot of criticism of Ben Bernanke lately, I have made a few comments myself. Some of the criticism is over the direction of policy, and some of it is related to his appearing to represent the administration's position on matters such as the budget deficit.

The Fed is structured to bring various interests to the discussion and implementation of monetary policy. The intent is to bring different geographical interests to the table (the northeast may be booming while the south is in recession  - what should policy be?), and to represent the interests of businesses, the financial sector, and the general public. In addition, there is an interest in coordinating monetary and fiscal policy so that they don't fight against each other (and they can, when Bush contemplated tax cuts, Greenspan explained that if they overheated the economy, then the Fed would have to raise interest rates to undo their stimulative effect). For this and other reasons, the executive branch is given influence at the policy-making table as well. This comes through the Fed Chair - the Chair is selected by the president and serves a four year renewable term. The Chair meets with the president and the administration on a regular basis, I believe around once a week currently, to discuss policy. If the president is displeased with how the Fed Chair conducts policy, there is no obligation to renew the Chair for another four-year term once the current term expires. So the Chair, unlike the other members of the FOMC, has an interest in cooperating with the president's wishes.

So it is to be expected that the Chair will reflect the administration's politics and preferred policies. However, in the end the Chair is independent. Though a Chair typically resigns if a term is not renewed, there is no obligation to do so. If Bernanke's term as Fed Chair is not renewed, he can still serve out his full seventeen year term. He'll still be on the Board, if he wishes, long after the current president is gone and his job will be much easier if the economy is doing well many years down the road giving him an interest in the economy's long-run performance. And of course, and more importantly, he'll have a better chance of keeping his job as Chair when the next president comes aboard if the economy does well which gives him an interest in the economy's performance that extends beyond the current administration. Thus, while the Fed Chair is subject to influence from the president, there remains strong incentives to do what's best in the long-run rather than what's best for a particular president.

Our politics may differ, but when it comes to monetary policy I have faith that Ben Bernanke and others on the FOMC have nothing but the best interest of the country in mind when they set monetary policy. I may disagree with their decisions, and I make it clear when I do, but I don't doubt they are doing their best to achieve the mandated goals of output and price stability.

Comments

[save_the_rustbelt]

Chairman Ben should stay out of politics, especially Bush-ite politics, which appear to be be headed for the lamest of lame-duckness.

[js paine]

mark
i would be delighted to see more of your reasoning here

vis a vis
fed indi status
nothing could be more basic
nor more at the center
of your professional focus

needless to say
i'm an ultra
fed as creature of congress freak
but you i know have

"the best interest of the country in mind .."

[pgl]

Did you check Will's claim that low inflation was the main cause of economic growth? Will seemed to be criticizing Franks on the Congressman's view of the natural rate of unemployment - but stopped sort of saying what Will thinks about this issue. I don't see Congressman Franks as saying the FED must follow the will of any political party. Rather what I see in Will's oped is his usual garbage of assuming Will is smarter than the rest of us. But anyone who thinks low inflation is the main cause of economic growth isn't even as smart as those nitwits at the National Review.

[anne]

The Federal Reserve mandate is double, protecting against inflation and stimulating growth and employment. Barney Frank can make this clear any time and every time, because the Fed can too easily forget. As for bullying, ain't no bullying like cut and run bullying Republican bullying, so not to worry. Say what?

[maria]

I think of G. William Miller who chaired the Fed, as I recall, during the wild inflation of the last years of the Carter administration. My recollection is that he was influenced by political pressures to keep interest rates low when they probably should have been aggressively raised. Paul Volker was then called in to clean up the mess.

[Mark Thoma]

The Taylor rule - targeting both output and inflation stability - is an operationalized version of an optimal policy rule that maximized household welfare. Again, inflation stability is a means not an end. It is only important to the extent that it affects things that matter.

Also, reminding is fine, though the Fed has not forgotten even for a moment what it's job is even if others don't fully appreciate the interconnectedness of the elements of the mandate; threatening without cause is not fine. The Fed is too important for political games.

[js paine]

maria beware grimm's tale versions
of the "useable past "
poor miller has become
the mrs o'leary's cow
that kicked over the lantern
that started the great chicago fire

"wild inflation"???
if policy induced and out of control like a frankensteins monster
i'd use another word

maybe out of control is what the instapundits of real wage rate control might call it

the great inflation .....indeed
a global conflagration

the story piles on top of itself

lets see the photographs
of the victims of this horror

for that matter
can you compare it
to the blow out of russia in the 90's ????
long after the magic potion was well in hand

"price level policy is a tool of the class struggle "

no keynes didn't write that

i did back in 1979 just as the "correct" policy
took i biggo type u turn

this i'll grant

the secret of the last 30 years is inside that channel of events
we call the great inflation

just try not to listen to hard
to the great satan's
retelling of the story

[bob mcmanus]

js paine gets a birdie from me. Cryptic, but dead-on

"I have faith that Ben Bernanke and others on the FOMC have nothing but the best interest of the country in mind when they set monetary policy."

I do not have that faith. And monetary policy is the biggest problem I have with current liberal economists.

[Mark Thoma]

I knew this one would be controversial when I wrote it. This is where B. Frank first showed he was becoming aware that in modern macro models there isn't necessarily a tradeoff between inflation and output stability:Mr. Frank's plans, which he described in an interview Friday with The Wall Street Journal, suggest Mr. Bernanke, ... could face added political heat for
unpopular steps such as raising interest rates. It also raises the importance of his cultivating lawmakers to pursue potentially contentious initiatives, such as
a numerical inflation target.

Mr. Frank said that while he opposes an inflation target, the Fed has the authority to implement one without Congress's approval.

Mr. Frank said the Fed shouldn't allow a target to result in employment being subordinated to inflation, and he wouldn't allow the Federal Reserve Act to be
amended to allow that to happen.

However, Mr. Bernanke has argued an inflation target doesn't require the act to be amended, and in fact enhances the Fed's ability to boost employment. The
FOMC is now in the midst of a lengthy internal discussion over how it communicates, including whether it should adopt a target.

Mr. Frank appeared open to that argument. ... Political opposition is one of the greatest stumbling blocks to Fed adoption of an inflation target, and assuaging Mr. Frank's concerns would go a long way toward removing that obstacle. ...

[anne]

"The Fed is too important for political games."

Please, we are incapable of not playing political games. George Santayana understood this a century ago; we are political creatures. That does not mean there is no integrity to the memebers of the Federal Reserve board, but the last thing I can imagine is having board who are politically insensitive.

[anne]

Ben Bernanke is touched and becomes religious and asks the fiscal Gods for to cut Social Security benefits. When? When there is a Democratic Congress? Before this, Bernanke was a confirmed athiest. Please. I am all for freedom of religion, but do not tell me Bernanke hasn't been touched. [Confession, soon.]

[Mark Thoma]

I think a fair reading of his remarks shows he did not take a position on benefits versus tax cuts. That is my opinion, others see it differently.

As Fed Chair, continuous deficits have to be a concern because they will eventually force the Fed's hand. I think he holds these concerns honestly. I've been entirely consistent in calling for him to make these connections (between monetary and fiscal policy) clear when he talks about the deficit issue.

And one more note, I do hope that monetary policy is based upon theoretical and empirical considerations about what is best for the economy and not the politics of the moment. That's the point of having a (relatively) independent Fed. Ben Bernanke knows that literature as well as anyone, anywhere (and if he doesn't, people like Mishkin do) and I fully trust him and others on the FOMC to evaluate it with the public interest in mind.

[js paine]

integrety to their values

but anne what if their values are not the values
of the zillions of jobsters out here

what if the theory is "we know what's optimal for you
and you don't
you're short sighted and unable to forgo the ice cream today for the whole dairy next decade

shouldn't we ask
ourselves

why elite pundits
of pure motive
are convinced
charting our optimal credit path
can't be trusted
to democracy

then what have we here ??

a republic with a supreme council
of babbit ayatollahs

where per chance
it counts most ????

[js paine]

my integrity is getting me over the top

sorry

i'll pull down the jolly roger

[anne]

When the Federal Reserve chair singles out Social Security which has a monster surplus for criticism, not to mention Medicare on which lives hinge, then the chair has intimated cut benefits or raise taxes. Either alternative is political and either I oppose. Now, I am political but so is Ben Bernanke. James Galbraith is not the only one who is being political in disagreeing with the chair.

Ben Bernanke is fine fine fine as Federal Reserve chair, but political is what he must be. And, the same remarks could have been remarked in, say, July or August or September.

[Mark Thoma]

I think some of this is the price Bernanke is paying for Greenspan's politicizing of the job. As I've said before, I think it might help if the Fed's remarks on the deficit were confined to the direct implications for monetary policy (which is still a pretty broad list of topics).

[anne]

Again, I would vote for Ben Bernanke as Federal Reserve chair in a moment while choosing to argue all the while. Also, I agree with you other than that we can distance or detach ourselves from being politically sensitive if political creatures seems too abrasive. Also, I think Alan Greenspan a gem at reading the economy though I might have been a little little more willing to allow lower short term interest rates.

[js paine]

mark
i agree
the fed chair needs to use the expertise
of the fed staff on fiscal montetary policy interaction
the way say the chair of the joint chiefs ....
(i use that analogy advisedly )

to lay out options and the constraints
on those options
given various deficit pathways
as to the inner works of tax and spend that should only effective his remarks in as much as they make
for aggregate differences
other then that
while in that chair
he needs to keep his trap shut
in public
so far he hasn't

[anne]

Brad DeLong would have been a little quicker to tighten than Alan Greenspan, but DeLong always thought Greenspan proved right. The loosenings I have in mind are too conjectural to judge properly, so I am a little less convinced by James Galbraith. Heck, I do like Barney Frank pushing a little.

says...

Maria (Jan 20, 2007 4:46:48 PM) wrote: G. William Miller who chaired the Fed, as I recall, during the wild inflation of the last years of the Carter administration.

Carter was president from 1/20/77-1/20/81. According to Wikipedia, Volker took over as Fed Chair on 8/6/79, so was head of the Fed for the last 3/8ths of Carter's term. Miller had been Fed chair since about a year and a half earlier. Carter gets far too little credit for appointing Volker.

[lonesome moderate]

It seems to me that, at least regarding entitlements, Bernanke's congressional testimony was essentially a toned-down version of his October 4 speech at the Washington Economics Club (http://economistsview.typepad.com/economistsview/2006/10/bernanke_will_w.html). To me, that speech makes it pretty clear that he considers entitlement reform to mean cutting retirement benefits--if it didn't, then why the emphasis on giving people extra time to save for the future? In Bernanke's defense, though, the fact that he said this before the election seems to indicate that he would have pressed the same points with a Republican congress.

[Cassandra]

Slink asked:
why elite pundits
of pure motive
are convinced
charting our optimal credit path
can't be trusted
to democracy

Slink's question is good, and certainly more perceptive than first appears. There IS the obvious retort that, if not separate, those in power (whether democratically elected or not) simply cannot resist (or more accurately, have not been able to do so historically) using the power of debasement and seignorage in order to perpetuate power for privileges' sake. This is especially true in a democracy like America's (with lower-case "d") where private money efffectively buys legislative and executive control for parochial self-interest. While in most advanced countries, the debasement is on the order of perpetual petty larceny, the error term is on the side of great inflation vs. deep revulsion or depression. So handing the keys of monetary policy to the learned, Weberian technocrat at the very least will, when erring, make honest and well intentioned mistakes in the prevailing public interest, in attempting to steer a course that neither enriches the ruling class to an extent beyond what they've already been blessed with (or earned or stolen), or unncessarily impoverish the working class more than fate or free-will has so conspired.

Grand social experimenting such exploring the potential boundaries of the Phillips-curve should be in the hands The People, and IF they elect Michael Moore, and on Their behalf He decideth to disperse care packages of federal hunks-'o- butter, Bundles of Money along with Jars of Gum'nint Peanut Butter to those without, then let it be so. But they would need to legislatively re-architect our Money System, along with, it seems to me, re-architecting a number of the most Basic the laws of Economics. And with regards to the latter, they may re-write them in fact, but I do doubt whether the people will adhere to these new laws, any more than they did Nixon's laughable attempt to legislate imposition of wage and price controls.

But even this retort may already be dated, and focusing upon the wrong argument. The real reason may be that somone even more nefarious has - in this globalized BW-Two world - stolen the keys from both the pure-of-heart elite pundit and the Weberian Technocrat, and they are still elbow-deep into the cookie-jar having emptied it already into their and their friends private accounts.

[js paine]

cassandra i think
gets at the inner wiring of the public savant/servant

we exist and operate
above
the negotia of babbit inc
and more importantly
the phoney wage increase validation
pressures
from
the high- pay-
low -value added-job
protection club

and this point falls out of the hole in those
non partisan pants

the public is hard to serve
when its interests break into opposing camps

take the taylor rule...please !!!

--------------------------------
take the great dilemmma
horror child of wage price spiraling...
stagflation

how do class allegiance free
elite policy maker types
deal with simultaneous
too high inflation
and
too high unemployment...

call for a volcker
who like bismarck will
use the autocrats gloved iron hand

doubling unemployment doesn't threaten
the system
the way out of control prices can...

we get the 79-82 hump a dump

we're told by these same experts
if the taylor rule has been in use
for a decade or so
then a stagflation state
is rendered impossible or nearly so ....

hence
the anti majority short run effect
of the taylor rule
is long run joblessness crisis avoiding

when by the application
of taylor's simple magic rule
the fed
keeps the trade off "in hand"
and pre- empts
the stagflation
by the occasional slowing
of job growth
maybe even hiccup-ing it some ....
we are safe from great inflation II
since
external shocks alone
can't produce
the stagflation end state

[anne]

Ah, remember, the mandate of the Federal Reserve has not been singular, but was changed from just an initial focus on monetary stability to a joining focus on growth and employment. The Euro bank however has a singular focus in line with differing political pressures. Where I have thought Alan Greenspan's deserved credit as a central banker should come is in being willing to press for lower short term interest rates than would have suited most monetary specialists through the 1990s, thereby allowing for stronger growth and job creation while inflation cycled down.

[js paine]

but what of great deflation II ???

wqhat if
the taylor rule is impotent to create credit demand
by lowering the short rate to zero ???

questions abound
when firms and households either don't want to borrow
or can't get a loan because of default risk rationing

[js paine]

the lesson of the great depression includes
prepared ness

institutions prepared to re act to a crisis with special crisis tools

like loan payment holidays
and uncle backed loan co signing
and vast fiscal expenditure increases
brimming with moral hazard

can a system lulled by taylor banality
cope with such horrors

of coures their arrival is unimaginable
that's the point

but are they impossible

cause we have sealed chambers
that can contain any flooding gash
up to three bulkheads long

here comnes the five bulk head gash

[js paine]

btw

answer this why not an explicit
unemployment rate target ???

asking it provides the answer

no policy maker will openly say
he/she wants to put a floor
on the unemployment rate

why ???

if a ceiling on the inflation rate is kool .....

notice
the alleged "natural" rate of employment

"folks
the economy has a job level sweet spot
where inflation is steady "

it changes and we can only guess where it is

so we will lower the existing rate
to historically low levels
at ever increasing risk

i love it like there's an unknown unemployment rate
which if we go below it
we trigger a sinisterly lagged timed inflation bomb

once we've passed that rate and conitnued down till the inflation bomb goes off

we'll be in rreal trouble

so proceeed at extreme risk

the great wage price spiral is waiting out ther
to swurl up

like a thousand funnel clouds
ready to rip thru the economy
and turn it into tatters

[Mark Thoma]

Why no unemployment target?

Implicitly there is (the y-y* or U-U* terms in the Taylor rule, U* is the target value), so the question is, as with inflation, should they commit to an explicit u-target?

I've wondered the same thing and I remember seeing an answer in the past, but unfortunately I don't recall precisely what the answer was.

Here's one story. In Europe, Canada, Australia, etc. the central banks target just inflation, unemployment/output is not part of the interest rate rule. The idea of explicit inflation targeting has been imported from there, so there's no history/literature on explicit u-targets like there is for inflation targets, hence it has received less attention.

If I can remember, or find the other (perhaps better) reasons, I'll follow up.

[js paine]

thanx mark

despite the blatant fact
taylor rules indeed require a number to plug in for u*

but how do u publiizes this
and defend it ??

unlike inflation fighting

explicit higher employment fighting is unsavory

so disguise it as over heated output growth...

if its an output growth number target
it doesn't exactly imply
a target rate of unemployment
since productivity change mediates

but all casuistry aside...

my guess soon enough the public debate would find its target

ie
that the real target is an unemployment rate floor

and it would quickly become
a dart board for us rad leftos

notions of the wage price spiral
dancing in policy makers' heads
must stay there

despite the reality

that
ultimately
even if thru a proxy
the fed targets
an unemployment rate
that is the "notional"
natural rate
famously revised downward in mid stream
by greenspan in the late 90's
---------

ps
nice thoughts arise
on just how you sell your choice
when
explicit targets for both
are shown to be in conflict

and force out the taylor weights
ie
force out the likely inflation fighting
comes first tilt ....

[anne]

Through recent years of the difficult integration of the east by West Germany, I argued that the Euro bank needed a mandate as ours rather than the traditional German mandate. I think now that I was wrong, both in light of the success of German integration and because more stimulative monetary policy could be damaging in Euro economies that use fiscal policy even more liberally than liberal Euro standards. Increasingly, I think the German approach proper expecially since Germany stimulated real estate which was obviously under-valued. Monetary polict to accomodate Germany and Ireland and Italy is tricky.

[anne]

Notice that the Euro has gained quite a mild 6.3% through January 18, over the last 10 years. Investors are obviously content with Euro values, and portfolio analysis tells me they have become more so whether surprisingly or no.

[dale]

I could listen all day when slinky-pinky-jsp talks about the linkage between technological expertise and class interests.

truth is- debate within the technocratic community is either constricted to a limited set of perspectives- or if not- is would be just as ruckous as the political struggles in the real world. There would still be need for a consensus process. And politics- democracy- is- famously imperfectly- the most legitimate means of consesnus like decision making. unless you want to make the technocratic decision making process more like a scientific or medical process- but even there are consensus processes working.

[dale]

the suspicion being that technocratic decision making processes are in reality one-sided or not multi-sided enough. the suspicion being that various versions of Adam's Fallacy are at play, unbeknown and unacknowledged.

that said- the current situation could be better than a self conscious politicization. you never know.

[js paine]

i think barney frank is a glimmer of light
dale

no more

but not darkness

[Cassandra]

Slink said:
the public is hard to serve
when its interests break into opposing camps

When the muck really hits the fan, Mr Weberian Technocrat, will side with the people armed and potentially dangerous. If he were smart he would currently be handing out Govt Beer with the Govt Butter, to better cut a path for such eventuality. They WILL remember. The ruling class is fun to hang out with so long as they are ruling. This awareness should help clarify any technocratic confusion as to where one's allegiances lay.

Slink also said:

doubling unemployment doesn't threaten
the system the way out of control prices can...

I must admit to having no a priori answers to the late 70s stagflation conundrum, other than to point out that the pain was somewhat universally felt. Real Estate, Equities, Bonds, Art, Farms, more or less everyone was crushed more or less democratically. And when the pain is shared, it is, as the Brits of 1940 will tell, easier to bear stoically. But great inflation - up 'til the point of implosion - creates a Pyrannean-sized wedge between asset owners and the rest. And this is precisely one of the primary driving forces of inequality we are witnessing today. So I agree essentially with your statement with the caveat that it does depend to some extent what the starting rate of the unemployment is (prior to the doubling). An already-double-digit beginning rate would of course have profound systemic conequences such that even the couch potatoes might descend upon The Capital...

And more:
what if
the taylor rule is impotent to create credit demand
by lowering the short rate to zero ???

You are approaching Helicopter Country. And I agree with your sentiments AND all the policy response aces up your sleeve. But you - rather, but Central Bankers and The Authorities - if they wish to be respected cannot ever ever ever SAY they will do these things. 'Cause the Specs, (and that is upper-case boldfaced "S"), like a tyrant of-a-child throwing tantrums in public, will gleefully abuse the system with abandon, if they know the authorities will always yield, always quickly, and if you yell loud enough, with more than one asked for. And just as Nanny-911 (morbid fascination compels me to observe from time-to-time) tells all the pathetically unfortunate folk who've not discovered the child-rearing secrets to enforcing rules, tough love, etc. you've got to be firm, and unwavering, and sometimes - depending upon the situation- be prepared to go to great extents and feats of resolve to let them know who is in-Charge. So the Helicopter is not theoretically stupid, but Mr B's public proclamation of his eagerness to use it has so compromised him that he will now have to go to much greater lengths to make the market believe - if only for a while - that it was a hypothetic or theoretical comment, and that in reality, every situation is different and will be weighed upon its own merits, causes, and factors.

Also, these issues seem to be peculiarly American problems for paradoxically, the American legislative and executive branches of government seem to have no such regard for labour or "the Public interest" as defined by "the majority", in comparison to the rest fo the OECD with independent Central Banks, but somehow in America, it is bizarrely our central bank who is legally charged with respecting Labour as some schizophrenic sense of the public interest. Now of course this is ass-backwards, and reflects little more than sheer cowardice on the part of the elected who cannot seem to find truth or wisdom anywhere within the beltway.

As for my unackowledged lens (in Dale's sense): skeptical as I am, I think overall welfare remains best-served by the fixing and making better the system. I am not a counter-revolutionary, but just think the Public Interest in the broadest sense is rarely improved by revolution vis-a-vis progressive evolution. And heeding my own advice to current and would-be Central Bankers, so as not to embolden Capital, I woud highlight that there are, of course, exceptions...