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Sunday, November 20, 2005

Why is Public Interest in the Fed Falling?

Alan S. Blinder of Princeton University was vice chairman of the Federal Reserve Board from 1994 to 1996. He explains why the Fed as not as prominent in the national news as it once was:

Are the Fed Fights Over? By Aan S. Blinder, Commentary, NY Times: Something rare and important happened in Washington on Tuesday. ... The Senate held a hearing on the nomination of Ben Bernanke to be the new chairman of the Federal Reserve Board. The last time that happened was in July 1987, when Alan Greenspan was first confirmed. Before that, it was Paul Volcker in July 1979. This newspaper's own coverage offers a revealing historical progression. On the morning after Mr. Volcker's hearing, the paper ran a Page 1 article ... Eight years later, the article on Mr. Greenspan's confirmation hearing appeared on the first business page. And... the account of Mr. Bernanke's hearing was on Page 4 of the business section...

The Federal Reserve chairman is widely agreed to have more influence on the national economy than does the president of the United States. Yet the national news media - as opposed to the specialized financial news media, which dote on the Fed - seem to find monetary policy less engaging than they did in 1979 or 1987. Why? One reason is clearly Mr. Bernanke's ability and qualifications, which make him a stellar choice in the eyes of Republicans and Democrats alike. ... But that cannot be the whole story, for Mr. Volcker and Mr. Greenspan were also widely acclaimed at the times of their confirmations. A second reason is that these are pretty placid times for the nation's central bank. The United States has not had an inflation scare for 15 years. While the Fed is now raising interest rates, it is merely bringing them up from their previous abnormally low levels ... at a pace it calls "measured," with clear warnings at each step. No fuss, no muss, no bother - and limited public interest.

The situation was different when Paul Volcker went up for confirmation in July 1979. High inflation had plagued the country for years and was about to get worse. Taming it ranked high on the national agenda, maybe at the top. So the Federal Reserve's monetary policy claimed the public's and the news media's attention. By the time Alan Greenspan was confirmed in 1987, inflation had been under control for several years, and the Fed's policy interest rate had barely changed over the previous 15 months. Both inflation and the Fed therefore commanded much less of the limelight. If you read the hearing transcript, you will find that as much attention was paid to the federal budget deficit and the trade deficit as to inflation and the Fed's interest rate policy. (Sound familiar?) ... But there is a third, and very important, reason that Mr. Bernanke's nomination and confirmation have received so little press attention. The happy truth is that monetary policy is not very controversial - and is certainly not very political - these days.

Instead, there is a strong intellectual and political consensus that the central bank should be free of political interference, should keep inflation low and should promote high employment. Furthermore, while central banking remains part art, part science, the science has clearly been gaining on the art in recent decades. Central bankers around the world are increasingly thought of as technocrats, not as philosopher-kings or sorcerers. It was not always thus. In the early days of the republic, Hamilton and Jefferson battled over whether the young country should have a central bank at all. No one was thinking about "monetary policy" back then, but they were thinking about "sound money." While Hamilton won that debate, the first Bank of the United States lasted only 20 years before falling prey to populist politics. A similar fate befell the second Bank of the United States under Andrew Jackson. These were intense political struggles. .. In fact, ... [Bernanke's] hearing illustrated a new reality: that debates over monetary policy are now apt to be boring and technical - and far removed from politics.

These are salutary developments. John Maynard Keynes once longed for the day when economists would be "humble, competent people, on a level with dentists." At least as far as central bankers are concerned, we are not quite there yet. Mr. Bush's choice of Mr. Bernanke remains far more important than his choice of a dentist. But not important enough to make Page 1.

The underlying theoretical support for inflation targeting in the conduct of monetary policy and the more technocratic approach that comes out of it may owe part of its success to the fact that such an automated rule-like transparent process helps to remove politics from the process. Commitment to a particular course of action that is known in advance and enjoys theoretical support makes it easier to resist political  pressure to change course and, as noted in the article, helps to confine the debate to the technical merits of the approach.

    Posted by on Sunday, November 20, 2005 at 12:33 AM in Economics, Monetary Policy, Politics | Permalink  TrackBack (0)  Comments (17)

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