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Can the Federal Reserve stay independent?

Guest blog from Economics Editor Peter Coy

Fed watchers note: Fed Vice-Chairman Donald Kohn is testifying this Thursday on the topic of Federal Reserve independence. It’s before the House Financial Services Subcommittee on Domestic Monetary Policy and Technology. Should be interesting, coming on the heels of Fed Chairman Ben Bernanke’s efforts to fend off congressional attacks, including a bill from Texas Republican Ron Paul seeking to audit the central bank.

Before he joined the Fed, when he was still a Princeton academic, Bernanke seemed to take the position that the Fed merited plenty of independence simply because it was uninvolved in politics. There’s nothing political about managing the economy to hit an inflation-rate target that everyone agrees on, right?

But it’s clear now that Bernanke has a bigger vision for the Fed, one that involves supervisory powers over the entire financial sector. You can argue that the Fed had broad power already, but in politics you never know how much power you have until you try to exercise it. That’s what the Fed is seeking to do now—test its limits.

The deeper the Fed wades into running the financial system as well as the economy, the harder it will be to maintain its cherished independence. That’s just a fact of life in a democracy.

Here’s a link to a blog citing comments by St. Louis Fed President James Bullard defending Fed independence.

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