As both a former Congressman, former owner of a small manufacturing company, and the CEO of the Financial Services Roundtable, I understand the value of price stability and full employment. I also fully understand that these goals cannot be reached through the politicization of the Federal Reserve and that the current debate, which has included both proposals to change the Fed’s mission and charges that border on demagoguery, runs the risk of compromising our central bank’s mission and weakening the economy.
This absolutely cannot be allowed to happen.
The independence of the Federal Reserve is vital to the success of financial markets and, if damaged, the vitality of the United States economy will be seriously compromised. Academics, statisticians, policymakers, and economists have confirmed that countries with independent central banks experience lower and more stable rates of inflation. Additionally, there is broad consensus that one of the Fed’s primary missions — price stability — is an important contributor to an economy’s growth and employment prospects.
In a July 9, 2009 testimony before the House Financial Services Committee, Federal Reserve Vice Chairman Don Kohn stated “Any substantial erosion of the Federal Reserve’s monetary independence likely would lead to higher long-term interest rates as investors begin to fear inflation…Higher long-term interest rates would further increase the burden of the national debt on current and future generations.”
Since it was created in 1913, the Federal Reserve arguably has been the most robust example of an independent central bank. The key to that success has been the Fed’s balance of independence, transparency, and accountability. This has included semiannual monetary policy reports to Congress and the release of a statement and detailed minutes of each Federal Open Market Committee (FOMC) meeting, published summaries of the economic forecasts of FOMC participants four times a year, financial controls that are examined by an external auditor, seven members appointed by the President that require confirmation by the Senate, a Presidential and Congressional review of the Chairman and Vice Chairman every four years, and frequent audits by the Government Accountability Office on a broad range of functions. The new disclosure requirements included in the Dodd-Frank Act will make this balance even stronger. Indeed, because of a Dodd-Frank requirement, the Fed last week released 21,000 documents about its lending programs during the fiscal crisis that provided Americans with extremely detailed information about who received how much and what it cost taxpayers.
As these documents show conclusively, the Fed has taken a number of actions over the past two years to stimulate the economy and help financial markets climb out of the deep hole created by the financial crisis. Faced with what it considers to be a lower-than-appropriate rate of GDP growth and stubbornly high unemployment, and given what it sees as uncertain additional fiscal policy changes, the Fed most recently announced a $600 billion quantitative easing policy – QE2 – to stimulate employment and the economy further.
Reasonable minds have argued both in support of and against the effects of QE2. But the Fed’s authority and ability to act independently to pursue needed economic improvements is not up for debate. In fact, that authority is mandated by law — the Humphrey-Hawkins Act of 1978.
In 1913, Congress intentionally insulated the Fed from the political process and election cycles. Federal Reserve Vice Chairman Don Kohn spoke about the importance of “operational independence,” what he said was “independence to pursue legislated goals” during his July 9th testimony. That’s exactly what the Federal Reserve has been doing — acting with independence, transparency, and accountability to strengthen the economy and it should be applauded for doing that.