AS A policymaking institution, the Federal Reserve has two sources of legitimacy. The first is its mandate from Congress, enacted in 1977, which requires the central bank to “promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” The second is the unique technical expertise the Fed’s board of governors, and its staff, bring to bear on that multifacted mission.
What the Fed is specifically not supposed to do is to set interest rates according to what various segments of the population or market players tell it to do. In that sense, the dueling teach-ins and demonstrations on the sidelines of the Fed’s annual retreat in Jackson Hole, Wyo., were perhaps a positive development for free speech but not for the Fed’s institutional independence, real or perceived.
The very hallmark of central-bank independence, without which there is no point in having a central bank, is the occasional willingness to resist popular pressure, even to tell the majority of Americans “no.” To be sure, the Fed is not purely apolitical; the president, a politician, nominates the chairman, subject to the approval of other politicians in the Senate. Congress exercises regular oversight of the Fed. And, obviously, everyone from hedge fund moguls to the former secretary of the treasury to gold-standard enthusiasts to workers making $8.50 an hour has a right to hector, kibitz and importune the central bank.
But there’s a fine line between listening respectfully to various voices affected by Fed policy and submitting to interest-group lobbying and politicization. Whatever the Fed decides to do about interest rates in what figures to be a crucial September meeting, it cannot appear to be swayed by the arguments of Fed Up on the left, which wants a continuation of 0 percent interest rates, or the American Principles Project on the right, which disagrees. Still less can the Fed respond in knee-jerk fashion to the volatile global stock markets, lest the impression arise that monetary policy exists to prop up equity prices. It’s bad enough that markets came to believe in a “Greenspan put” for Wall Street when Alan Greenspan was chairman of the Fed.
No, the Fed must stick to principles and data — which is admittedly a tall order when so much is riding on its decisions and when the data’s meaning is so open to interpretation. Inflation is low, which argues for continued zero interest; second-quarter growth has been revised robustly upwards, suggesting that the U.S. economy is strong enough to thrive without zero interest, which stimulates but also distorts. Americans variously demand a Fed that’s compassionate, or tough, but those are really the attributes of a majoritarian political body, like Congress. Those who would root for it to validate this or that trading strategy, or subject it to populistic pressure from the right or left, ought to be a bit more concerned about wearing down its institutional independence through constant lobbying. What Americans really need the Fed to be is impartial.