Less Autonomy for the Fed

Why should the Irrational Fed be so Indirect and Autonomous?
The Federal Reserve is one of the most autonomous governmental organizations in the United States. The legislation which defines the mission of the Federal Reserve is stated as a dual mandate. The Federal Reserve is “supposed” to pursue monetary policy which achieves both price stability and maximum employment. However, the Federal Reserve has not always acted accordingly in achieving these objectives.
The United States Federal Reserve has two types of independence in conducting monetary policy: instrument independence and goal independence. In achieving their long-run objectives the Federal Reserve is not subject to the same provisions as other governmental agencies. As demonstrated historically the Federal Reserve has not always performed its actions in accordance with the well-being of the economy. United States policy needs to be reformed to make the Federal Reserve more accountable for its actions.
After the Depression of 1920-1921 the Federal Reserve initiated an expansive monetary policy which lead to the Roaring 20’s. This expansive monetary policy kept interest rates artificially low creating a bubble in the prices of many assets. After the advent of the Great Depression, the Federal Reserve than curtailed the supply of money putting us into a deeper recession.
In the 1970’s Federal Reserve monetary expansion policy led to inflation rates which increased to almost 20 percent. In their effort to promote full employment the Fed lowered interest rates artificially. This led to the expansion of the money supply and extremely high inflation rates.

The Federal Reserve’s ability to essentially influence the amount of money is a cause for concern. In the wake of the Great Recession the Fed resorted to unconventional monetary policy to stabilize the economy. Open market operations have increased the M2 money supply by over $10 trillion dollars in the past 30 years. The Federal Reserve has initiated Keynesian counter-cyclical policy to boost investment and consumption in the economy. Why was an unprecedented expansion of the money supply allowed to be implemented without any regard for the long-term health of the economy?
In Bernanke’s quest to allow for more transparency in the Federal Reserve, he has undertaken an inflation target of 2%. However, this is not enough to demonstrate more transparency in Federal Reserve Policy Despite Bernanke’s intention to create more transparency, the Federal Reserve still creates confusion among investors. The Federal Reserve had previously established keeping interest rates near zero as long as unemployment was above 6.5 %. The Federal Reserve is now dropping this indicator as a parameter of when to raise interest rates. It now will rely on a wide range of information, including measures of labor market conditions, indicators of inflation pressures, inflation expectations and readings on financial developments. Along with projections which showed benchmark interest rates rising, the Fed is causing confusion for investors. The current Fed Chair Janet Yellen told investors to focus on the central bank’s policy statement.
The most recent economic outlook predicts interest rates will rise by the spring 2015. The Federal Reserve is becoming very irresponsible in their reluctance to convey reliable information to the American public. The Federal Reserve’s extraordinary powers in controlling the money supply also come with great responsibility. They should be more willing to give investors a more tangible measurement of when they intend to raise interest rates.
Empirical evidence has shown that quantity theory of money is a good theory of inflation in the long run, but not in the short run. So how is the Federal Reserve pursuing interests in the long-term interest of the United States when it is using monetary policy to pursue short-term growth?
Those who claim the Federal Reserve needs some autonomy are not mistaken. A certain level of political independence is necessary. This prevents the Federal Reserve from being subject to pressure from politicians. However, in using its own tools of conducting monetary policy, the Fed is also free from the provisions which are able to remove ineffective officials.
The Federal Reserve should be more thoroughly regulated. It should also have to attain certain economic performance measures. Regulations should also be introduced which control the Fed’s budget. Greater transparency will ensure that the Federal Reserve acts in the long-term interests of the public.



Works Referenced
1. Bresiger, Gregory. "The Great Inflation Of The 1970s." Investopedia. N.p., 08 July 2009. Web. 10 Apr. 2014.

2. "Historical Inflation Rates: 1914-2014." US Inflation Calculator. N.p., n.d. Web. 12 Apr. 2014.


3. Kearns, Jeff. "Yellen's Quest for Clarity Over Rates Leaves Some Saying: What?" Bloomberg.com. Bloomberg, 29 Apr. 2014. Web. 29 Apr. 2014.

4. Lasswell, Mark. "Fed On Target To Raise Interest Rates In Spring 2015." Forbes. Forbes Magazine, 27 Mar. 2014. Web. 28 Apr. 2014.


5. Mishkin, Frederic S. The Economics of Money, Banking and Financial Markets. 10th ed. Boston: Pearson, 2013. Print.

6. Pithocarates. "The Federal Reserve, Roaring Twenties, Stock Market Crash, Banking Crises, Great Depression and John Maynard Keynes." Pithocrates. N.p., 25 Sept. 2012. Web. 21 Apr. 2014.

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