Out of Control Policy Blog

“Independent” Fed Becoming Political

With exclusive spots on CNBC, Bloomberg News, and a host of other media outlets, the members of the Federal Reserve System are quickly entering the limelight. Because the members of the Federal Open Market Committee (FOMC) have divergent views on current and future monetary policy, a few of them have decided to address the public concerning where they stand and why. As a result, they are gaining financial celebrity status and through their appearances they are pushing public, and thus political, sentiment for either easing or tightening. A once closed shop of backroom economists is now an open market ripe for public and political influence.

Though it is welcoming to have an increased level of transparency among Federal Reserve Board members and regional bank heads, the minute personalities and agendas get thrown into the decision making process, all is lost.

Decisions made at the Fed are becoming a hot topic particularly with the presidential campaign races heating up and candidates needing to establish battleground issues for which to justify their own existence. The right has clearly sided with the stable money platform advocating for strong dollar policies, anti-easing and inflation controls, and some calling for the abolishment of the Fed altogether. The left, with their never-ending slew of fiscal measures, like the most recent $447 billion American Jobs Act, advocates Fed easing and accommodative policies to act in concert with fiscal policy to support the twisted logic that loose money and inflation spurs job growth.

 Debate at this level requires leadership, and champions on both sides within the FOMC have answered the call.

Inflation hawks like Dallas’ Fisher, Minneapolis’ Kocherlakota, and to a lesser extent Philadelphia’s Plosser, have all dissented twice to further Fed easing policies at the last two meetings and have spoken publically on numerous occasions about their decisions and stance on monetary policy at both formal engagements and media venues. Minneapolis Fed president, Kocherlakota most recently spoke at an engagement in Sidney, Montana at which he stated:

The Committee’s actions at the last two meetings are inconsistent with a systematic pursuit of its communicated objectives. It follows that these actions diminish the Committee’s credibility and so reduce the effectiveness of future Committee actions and communications.”

Within the speech he warned that further accommodation risked future inflation and that because of the uptick in year-over-year core PCE inflation and decline in unemployment, “the Committee should have lowered the level of monetary accommodation over the course of the year.” 

That speech, which took place yesterday afternoon, was picked up by over 500 news sources in just 24 hours. An anti-easing speech by Dallas Fed president, Fisher, which we covered here, received similar media attention, and he went on CNBC to discuss his views that same week. Washington and the public are listening.

Strong dollar policies and Fed tightening are certainly warranted given the loose money alternative which destroys purchasing power and disproportionately burdens middle-class Americans, but should we be satisfied with and accepting of champions of sound money publically fighting for the cause within the FOMC?

It is necessary and important to have a balance of opinions within the FOMC particularly when the current Fed has been conducting an experimental campaign of a ballooning balance sheet, wide reaching private sector asset purchases, negative interest rates, and an overall onslaught of price distortions and institutional favoritism, but it is also dangerous when that balance of opinions becomes public and creates celebrities out of those choosing to take on the fight. It places undue pressure and influence on those to act in a directed manner vs. acting solely in a discerning matter based on judgment of facts and figures. It also emboldens the other side to defend their position for further accommodation. Chicago Fed president and dove, Charles Evans is a clear example of this.

As the fight grows and the champions’ celebrity status elevates, the debate becomes one more of principle, political wishes, and individual ideological pursuit. This is not the type of community with which Americans should be entrusting control over their sole medium of exchange. It is an unfortunate outcome, and one that has no alternative. The proposed solutions: a reversion to a gold standard or some form of competitive currencies, is currently out of the domain of most Americans’ imagination and understanding.

And, so, the debate continues, and we cheer our champions, unknowingly wasting our energies. The fight within the Fed is not worth fighting. The fight for an alternative needs a legitimate champion.

James Groth is Research Associate


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