FRB Vice Chair Makes the Case for Monetary Policy Independence
Commentary by Steven Lofchie
Board of Governors of the Federal Reserve System ("FRB") Vice Chair Stanley Fischer argued the case for "monetary policy independence to help foster desirable macroeconomic outcomes and financial stability." In an address before the National Economists Club, he stated that the economic environment has changed considerably in the quarter-century since economists began studying "the theory and evidence on the potential benefits of monetary policy independence." "The interaction between financial stability and monetary policy, its implications for central bank independence, and the resulting effects on macroeconomic outcomes deserve extensive study," he stated.
Commentary
Governor Fischer's remarks should be considered in light of Congress members' professed concern that the Federal Reserve Board operates in a manner that is unduly free from Congressional control.
Governor Fischer argues that the Federal Reserve Board (the "Board") is subject to legislation that requires it to be "held accountable for carrying out its mission effectively and efficiently." Unfortunately, it is not clear what this means. To whom is the Board accountable? For what is it accountable? If, as Governor Fischer suggests, the Board is accountable to Congress for maintaining financial stability, then it is reasonable to ask whether the Board succeeded in that goal in light of the financial crisis. If it did not succeed, then what does it mean to hold the Board accountable?
Governor Fischer's rebuttal is that the "Fed's response" to the financial crisis was a "carefully considered exercise . . . that was effective, appropriate, and necessary. . . . [Without the Fed's] operations, the U.S. economy would have suffered a significantly deeper and longer recession than the very substantial recession we did suffer."
Governor Fischer may very well be right, but claims about what the world would have been like but for [event X] (or in this case, the actions of the Fed) are inherently subject to uncertainty and debate. Notably, Governor Fischer's assertions about the conduct of the Fed pertain to the Fed's response in the wake of the financial crisis and not to its actions in advance of the financial crisis. It seems reasonable to believe that the Fed did well after the financial crisis, but poorly before; or the reverse, for that matter. Either way, it seems unreasonable to assume that a reasonable person could give the Fed nothing but high marks.
While many of Governor Fischer's remarks concern the role of the Fed in monetary policy, the greater part of the Congressional debate concerns the Fed's role as a regulator - not only of banks but also of non-banks - including its involvement in the Financial Stability Oversight Council. Various Governors of the Fed have described that involvement as being part of a "macroprudential strategy" - a strategy that involves the exercise of power well beyond that which the Fed has exercisedtraditionally.