Sunday, June 30, 2013

Op-Ed: It's time for the Federal Reserve to act independently

About 100 years ago, President Woodrow Wilson asked Congress to create the Federal Reserve System, which set off a fierce debate. Critics predicted that the Federal Reserve would become an economic dictator - an “invisible government by the money power.”

At the last Fed news conference, chairman Bernanke spoke of his timetable for scaling down quantitative easing  “If things are worse, we will do more,” he said of the nation’s economy. “If things are better, we will do less.” Talk about decisiveness! 

The debate about the role of a central bank in the U.S. has been raging since the founding of the country – and even today the Tea Party seeks to eliminate the Federal Reserve.

Is the Federal Reserve too strong? Is it now the all-powerful central authority that Americans feared it would become? Is it independent of the “money trust” it was created to tame?

These questions – and others - are being debated in op-ed pieces and faculty lounges across the country. I'm weighing in as well.

Bernanke said  “If things are worse, we will do more. If things are better, we will do less” when talking about the future course of monetary policy. For several days following his remarks, the financial markets tanked - stocks, bonds, commodities, and everything else. The markets' short-term hostile reaction to the prospect of a measured end to easy money should not make it harder for the Fed to reverse course. The Fed should act independently.

Like a trainer teaching a puppy, the Fed should follow through on its orders and remain in charge – not succumb the wishes of markets. Certainly during the financial crisis, the Federal Reserve had to step in and restore order – I think they saved the day.  

Since then, the super low interest rates and easy money drove investor funds into risky assets and sent prices higher, restoring bank and investment company balance sheets. Unfortunately the policy did not directly benefit the lives of the working class or seniors – as credit dried up and savings rates dropped to near zero. The bad actors got bailed out.

The Fed should follow through on a plan to taper down quantitative easing and allow the economy to function on its own by 2014 – despite the temper tantrum the markets will throw.  The economy can stand on its own two feet and its time to get back to normal - or at least its time to stop artificially holding interest rates below market equilibrium.


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