WITH ITS announcement Wednesday of an end to seven years of zero-interest rates, the Federal Reserve has rung down the curtain on the unconventional policies it adopted to fight the Great Recession. Any fair account of the Fed’s performance over that period must give the central bank great credit for helping to stem an epic financial panic and, subsequently, to stimulate renewed growth. Unemployment today is down to 5 percent, half its peak during the recession, and the economy continues to expand. That provides ample justification for the Fed’s decision to raise rates gradually, starting with a quarter-point increase en route to a projected 1.4 percent or so by the end of next year.
Of course there are risks. Other things being equal, higher rates could curb new-car sales and home-buying. They could strengthen the U.S. dollar, hurting exports and roiling emerging market economies. Equally obviously the U.S. economy failed to take full advantage of the Fed’s extended pumping of cheap money, which was not maximally converted to productivity-enhancing investment, public or private — as opposed to stock buybacks, mergers and other corporate machinations. Despite nominal job growth, wage growth and labor-force participation rates continue to disappoint. Persistent low inflation convinces many experts that the Fed could have waited even longer before raising rates.
Fed Chair Janet Yellen counters that it’s better to act now in a modest way than to wait too long and be forced to jack up rates when inflation surges. Such judgment calls, and the accountability for their consequences, are the stuff of a Fed chairmanship. Unencumbered by such responsibility, politicians immediately rushed to denounce Ms. Yellen’s perfectly defensible, and, indeed, long-foreshadowed decision. Rep. Jeb Hensarling (R-Tex.) blamed her for waiting too long to end “unsustainably” low rates; would-be Democratic presidential nominee Sen. Bernie Sanders (I-Vt.) called the move job-killing “bad news for working families.”
These comments were typical of the way in which discussion of Fed policy has become polarized along with everything else. To be sure, there is some bipartisan consensus about the Fed — mainly in the form of congressional raids on its reserve funds to avoid raising taxes or bills supported by populists of the left and right that would subject it to spurious “audits.”
Generally, though, the more the Fed necessarily involved itself in the direct management of a badly functioning economy, the more it became a political target. That was both inevitable and damaging to the Fed’s most precious resource: its political independence. We hope one benefit of normalized interest-rate policy will be a normalized political climate around the central bank. The Fed would not have needed to stimulate the economy so aggressively through monetary policy if Congress had done more of the job through fiscal policy. Now that the Fed is withdrawing from the fray, lawmakers will have to step up.
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