Will the Fed Lose Independence?

The speculation has increased that the Federal Reserve might be owned by the Democrats or Republicans, or both if each can get a piece of policy making. The notion is flawed, as the Fed keeps its own counsel about whether it will cut rates in September or later. And, even if the privacy of that counsel is breached, the governors are under no obligation to have disclosure of their deliberations change their outcomes.

Calls for whomever is the president to replace Bernanke when he is up for his third term on January 31, 2014, will not change how the Fed conducts itself. The central bank has made it through the economic crisis and recession without giving in to political pressure. Even if Bernanke is replaced, it is hard to image a new chairman who would be a puppet for one political faction or another.

The Federal Reserve’s independence has been challenged also as Ron Paul’s “Audit the Fed” legislation passed the House buy a vote of 327-98. Some of those who oppose the bill were alarmed. BusinessWeek reports:

“This bill would … jeopardize the Fed’s independence by subjecting its decisions on interest rates and monetary policy to GAO audit,” said House Minority Whip Steny Hoyer, a Democrat from Maryland. “I agree with Chairman Bernanke that congressional review of the Fed’s monetary policy decisions would be a ‘nightmare scenario,’ especially judging by the track record of this Congress when it comes to governing effectively.”

The bill is unlikely to make it through the Senate. If by some miracle it does, the president, Obama or Romney, would face the unprecedented decision to allow almost all critical aspects of Federal Reserve decisions to be examined, probably by the Government Accountability Office (GAO).

And if it is faced with these examinations, the governors of the Federal Reserves would be under no obligation to make decisions based on the political whims of politicians. Examination and successful coercion are far from one another.

Will the Fed be politicized? It is unlikely, even if the bank has to disclose some of the details behind how it makes policy.

Douglas A. McIntyre