Reforming or Deforming the Fed?

Prof Barry Eichengreen writes on the US govt’s proposal to reform the Federal Reserve.

He is obviously worried that these measures could actually deform the central bank:

Some of the reform proposals by Bernie Sanders, a contender for the Democratic nomination, also deserve to be taken seriously. The fact that three of the nine directors of the Fed’s regional reserve banks are private bankers is an anachronism that creates the appearance, and potentially the reality, of a conflict of interest. Sanders’ suggestion that the US president, rather than their own directors, nominate the regional reserve banks’ presidents is also worthy of consideration.

It is important to recall that the peculiar arrangements prevailing today were designed to overcome the financial sector’s opposition to the establishment of a central bank when the Federal Reserve Act was passed in 1913. This, clearly, is no longer the problem; on the contrary, the financial sector today is one of the Fed’s last staunch defenders.

Other proposals by Sanders are more dubious. For example, to release full transcripts six months after Fed meetings would guarantee a scripted debate. Meaningful discussion would simply move to the anteroom. The result, perversely, would be a decline in policy transparency.

Above all, Sanders’ recent statements betray a disturbing inclination to interfere in the conduct of monetary policy. The Fed, he argues, should not have raised interest rates in December in response to “phantom inflation.” He may be right. But it is not the role of the US president to tell the Fed how to manage its policy rate. The independence of the central bank is an essential cornerstone of effective monetary policy. Even – or especially – an aspiring president should be sensitive to this fact.

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