The Folly of Fed Bashing

The Folly of Fed Bashing
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WASHINGTON -- Fed bashing -- strident criticism of the Federal Reserve -- is back in style, and it's taken a new turn. Traditionally, it's been a liberal sport. When the Fed raised interest rates, liberals attacked it for driving up unemployment and oppressing small businesses. Liberal Fed bashing abated in the 1980s and '90s, as inflation and interest rates receded. The financial crisis prompted a revival, with the Fed vilified as Wall Street's lackey. This, too, has faded as the economy improved.

By contrast, Fed bashing from the right is on the rise. When Janet Yellen, the Fed's chair, recently testified before Congress, her reception was often hostile. One Republican congressman accused her of meeting secretly with the treasury secretary, characterizing these get-togethers as a partisan plot. Actually, the meetings date back to at least the Kennedy administration. Talks typically exclude monetary policy (the changing of interest rates), where the Fed's jurisdiction is supreme.

Interestingly, conservatives' mistrust of the Fed does not seem to reflect a fundamental disagreement over monetary policy. Of course, there are differences. Probably more conservatives than liberals think the Fed should quickly end its zero-interest-rate policy, but the dispute concerns timing more than direction. Almost everyone believes the direction should be up.

The present economy also dampens Fed criticism. Along with many others, the Fed is rightly blamed for the financial crisis, but its policies since then have contributed to a steady, if unspectacular, recovery. Inflation is virtually nonexistent (driven by lower gasoline prices, the consumer price index fell 0.1 percent in the past year). Since its low point, payroll employment is up 11.5 million.

It's less economic doctrine and more attitudes toward power that explain conservative Fed bashing. Many conservatives viscerally dislike Big Government, which they see as power-hungry, inept and corrupt. To them, the Fed is a large and aloof agency that needs to be tamed. It should become more open and accountable.

As rhetoric, this is strong stuff, and there's some truth to the indictment. Bureaucracies often are self-seeking, rigid and inefficient. But as a history of the Fed, it's simplistic.

In the mid-1960s, the Fed was indeed a citadel of concealment. There were no announcements of interest-rate decisions after meetings of its main policymaking body, the Federal Open Market Committee (FOMC). People watched financial markets for what the Fed was doing.

Since then, the Fed has opened up. There are now policy statements after FOMC meetings. Four times a year, FOMC members release their economic forecasts, including predictions of interest rates. Minutes of FOMC meetings, providing more details of members' views, are published soon after the meetings. The Fed's chair conducts four news conferences a year.

Nor is that all. Fed officials regularly give speeches and congressional testimony explaining their views. Here's the title of a recent talk by Stanley Fischer, the Fed's vice chairman: "Conducting Monetary Policy with a Large Balance Sheet." If more detail is wanted, studies by the Fed's 330 economists are on the Internet. In 2014, there were more than 170 of these studies (example: "Modeling money market spreads"). The Fed simply is not the barricaded monolith of its conservative critics.

In 1913, Congress created the Fed to wield financial powers too technical to be managed by a legislature. Since then, the Fed has acquired another role: It takes steps that, though initially unpopular, seem necessary for the nation's long-term economic health. Some Fed bashing is implicit in this. Politicians can criticize the Fed publicly, even if they privately support it. But for this arrangement to work, the Fed needs enough insulation from political pressures to act independently.

This is what the Fed's conservative critics would assail. One proposal would require an "audit" of the Fed. This would be no ordinary audit (do the books balance, is all the money accounted for?), which already exists. This would be a retrospective examination of Fed monetary policy, an exercise in second-guessing. Another proposal would require the Fed to adopt a specific "rule" to conduct its monetary policy and, if it deviated from the rule, to explain why. Yellen has countered that a rule, even if it could be changed, might make policy too inflexible.

There are no obvious advantages to these proposals. Their common purpose seems to be to harass the Fed -- to make it less powerful. This would fulfill conservatives' political agenda.

The danger is that it would exact a large economic cost. The Fed is the government's pre-eminent economic institution. Despite mistakes, it still commands respect, especially in financial markets. A Fed under political assault adds to uncertainty and subtracts from confidence. Economic growth is unlikely to benefit.

The Fed isn't infallible -- witness the financial crisis -- and its performance should always face inspection and criticism. But neither should it be the target of misinformed attacks. 

In conclusion...

(c) 2015, The Washington Post Writers Group 

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