Experts warn that regional Fed independence is vital to fighting inflation
The Federal Reserve Bank of Cleveland virtually gathered three experts together this week to discuss why independence from political interference with the Fed banking system is essential to setting policies that will fight inflation over the long term.
The session came as Kevin Warsh, whom President Donald Trump nominated to chair the Federal Reserve, predicted a “good family fight” over cutting interest rates, CNBC reported.
It also came after the federal government last week reported that inflation hit a three-year high in April — and some economists were warning it could stay high for the foreseeable future.
The Federal Reserve’s Open Market Committee raises and lowers interest rates based on economic conditions.Â
Lowering them can goose a sluggish economy by effectively making money cheaper and spurring economic activity, experts say, while raising them can cool an overheated economy and ease inflation.
Presidents can have a political interest in lowering interest rates because it can make borrowing cheaper, create jobs, and make voters happier — at least over the short run.Â
But if interest rates are lowered amid high inflation it can push inflation still higher — and undermine faith in the central bank, experts warn.
Trump relentlessly pressured former Fed Chair Jerome Powell — whom he appointed during his first term — to lower interest rates. The Trump Justice Department even opened a criminal probe into Powell, only to drop it in April.
Powell has stood his ground, and he took the unusual step of remaining on the Fed’s board of governors even after his second term as chairman expired this past Friday, allowing him to still fight interest-rate changes he believes are unwise.
Amid the changes, the Cleveland Fed organized an expert panel to talk about why it’s important for the system to be accountable, but also insulated from political interference. It was organized by the bank’s Center for Inflation Research.
“I’ve always believed that an independent and accountable Federal Reserve is essential for policymaking,” said Beth Hammack, president and CEO of the Cleveland Fed. “Monetary policy independence is important in achieving our dual mandate goals of maximum employment and price stability.”
Hers is one of 12 regional banks in the Federal Reserve system. It encompasses all of Ohio and parts of Pennsylvania, West Virginia, and Kentucky.
Michael Bordo, an economic historian at Rutgers University, said the decentralized aspects of the system mean that regional banks are in touch with local conditions all over the country.
The Cleveland Fed conducts surveys and interviews and publishes regular reports on those conditions, for example.
The regions also do their own economic research, Bordo said, and have made huge contributions to the central bank’s policymaking.
For example, in the 1960s the St. Louis Fed was closely involved in developing policies to measure and manage the money supply.
Bordo said the regions’ independence has allowed for an honest, public debate that has led to sound policies.Â
“The regional feds should be insulated from both outside political pressure and undue dominance by the Federal Reserve Board in Washington,” he said.
Athanasios Orphanides, an economist at the Massachusetts Institute of Technology, said that in a democracy, it’s important that institutions like the Fed are responsive to society’s preferences. But he said it’s also important to insulate them from one group’s political whims of the moment.Â
“The challenge is that politics can sometimes distort decisions, necessary but unpopular decisions can get postponed,” he said. “Things that we wish were taken care of don’t get done because they might compromise short-term electoral considerations.”Â
He added, “And this is why it is desirable to delegate some decisions to independent institutions protected from shortsighted political influence. This is where central bank independence comes in.”
SUPPORT: YOU MAKE OUR WORK POSSIBLE
SUBSCRIBE: GET THE MORNING HEADLINES DELIVERED TO YOUR INBOX.
Source: ohiocapitaljournal.com
Author: Marty Schladen
