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Fed Boss: Fed Must Be Free From Political Meddling

Wednesday, 26 May 2010 07:02 AM

 

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The Federal Reserve and other central banks must protect their ability to make key economic decisions free from political interference, Fed Chairman Ben Bernanke said Wednesday.

As governments move ahead on reforms to prevent another global financial crisis like the one in 2008, Bernanke stressed the importance of the Fed and central banks in other countries maintaining their independence over setting interest rates, known as monetary policy.

The Fed, for instance, often must make decisions such as boosting rates to keep inflation in check that are unpopular with politicians but are necessary for a healthy economy.

Politicians generally prefer holding interest rates low, which stimulate the economy and hiring.

"Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind inflationary pressures that worsen the economy's long-term prospects," Bernanke said in a speech at a conference in Tokyo on the future of central banking in a globalized economy.

"Thus political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation," he said.

Bernanke's comments come as Congress edges closer to completing action on revamping U.S. financial rules, and subjecting the Fed to more oversight.

A provision contained in a House-passed bill doesn't specifically carve out monetary policy from congressional audits as current law does. However, the House bill says the audits shouldn't interfere or dictate the setting of interest rates. A Senate-passed bill, on the other hand, provides for a one-time audit of the Fed's emergency lending program. Congress must reconcile the two bills before a final vote is taken.

Bernanke said the Fed's emergency loan program to banks also should be free of political interference. For years, the Fed — as a lender of last resort — has made low-cost loans to banks when they couldn't get financing elsewhere. The identities of banks drawing the loans aren't made public for fear of causing a run on the institution and defeating the purpose of the backstop.

He also said he thinks the Fed's decisions on purchasing long-term securities, a move to drive down interest rates, also should be protected from political meddling.

Congress' audit provisions emerged in response to populist anger over the Fed's role in bailing out Wall Street banks during the 2008 crisis. The rescues provoked public outrage at a time when many Americans are struggling with nearly double-digit unemployment, stagnant wages and rising home foreclosures.

In his speech, Bernanke didn't talk about the future course of interest rates in the United States or the European debt crisis, which has rattled Wall Street and stock markets around the globe.

But in a question-and-answer session afterward, Bernanke said central banks around the world generally agree on aiming for inflation of around 2 percent. The Federal Reserve does not issue an official target, though individual members of the Federal Open Market Committee provide quarterly opinions of where inflation should be in five or six years, he said.

"Despite increases in inflation a few years ago and now declines to very low levels in the United States, inflation expectations are remarkably stable," Bernanke said. "And that is in turn a factor which helps to stabilize inflation itself."

At its last meeting in late April, the Fed maintained a pledge to hold rates near record lows for an "extended period" to support the economic recovery in the United States.

Even as the Fed must retain its independence, Bernanke said it and other central banks must be accountable to lawmakers. The Fed has taken steps to be more open about its dealings and about its thoughts on setting interest rates.

Bernanke also said he does not want dollar-swap arrangements between the Fed and other central banks to become permanent. While they have played an important role in stabilizing financial markets, they should be used as an emergency backstop, he said.

Earlier this month, the Fed revived a program with other central banks to swap currencies. The Fed is lending much-in-demand dollars to other central banks in exchange for their currencies. In turn, the central banks can lend the dollars out to banks in their home countries to prevent financial crises from spreading.

——

Aversa reported from Washington.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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