Eichengreen weighs in on the “ Control of the Fed debate”

I think the tell tale paragraphs are these two:

These reforms reflected an overwhelming consensus that the Fed had been derelict in fulfilling its duties. It had failed to prevent the money supply from contracting in the early stages of the Great Depression. Heedless of its responsibilities as an emergency lender, it had allowed the banking system to collapse. When financial stability hung in the balance in 1933, the Reserve Banks’ failure to cooperate prevented effective action.

Given such incompetence, it is not surprising that subsequent reforms were far-reaching. But these reforms went in precisely the opposite direction from today’s proposed changes: fewer limits on policy makers’ discretion, more power to the Board, and a larger role for the New York Fed, all to enable the Federal Reserve System to react more quickly and robustly in a crisis. It is far from clear, in other words, that the right response to the latest crisis is an abrupt about-face.

A few months back, Ryan Avent made a clear statement:

We can debate whether the Fed has the right target or not; that’s an open and interesting question on which there are plenty of views worth considering. Do you know what’s not up for debate? Whether what we have experienced in America over the last few years represents good monetary policymaking. It doesn’t. Setting a public target, consistently missing that target, projecting that the target will be consistently missed in future, and conducting policy so as to make sure the target is in fact missed: that is lousy monetary policy making. And I cannot understand why the Fed does not see this record as detrimental to the recovery and highly corrosive of the Fed’s credibility.

The Fed needs a change in behaviour, a change in target, or a change in personnel.

HT Becky Hargrove


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