US lawmakers shouldn't politicise the Federal Reserve

WHILE investors on Wall Street are wondering if and when the US Federal Reserve will resume raising interest rates, lawmakers in Washington are considering ways to make it difficult for the central bank to do its job.

Leading Republicans on Capitol Hill have launched a crusade to "audit" the Fed, including its monetary policymaking. They want to set constraints on the central bank's independence and put pressure on it to change its policy direction. In practical terms, the Congress's Fed-bashers are demanding that the Government Accountability Office (GAO), an independent agency that provides the Congress with audit services, investigate and produce a report appraising the central bank's handling of interest rates. These and other proposals like the one requiring the Fed to spell out a monetary policy rule and then compare its decisions to that rule, and demand that it explain any deviations, sound like they are part of an effort to reform the institution in the name of "transparency" and "accountability".

But these and other plans would help only to compromise the Fed's independence, hinder the ability of its policymakers to perform their impartial role in setting monetary policy, and even limit its power in a crisis to act as "lender of last resort", while allowing politicians in Washington to micromanage the central bank's operations. Yet, as most of the serious research done by economists has concluded, politically independent banks are better at doing their job than those that are subject to constant scrutiny, if not harassment, by politicians trying to advance ideological agendas and to deal with short-term pressures from constituencies and interest groups.