Fischer Advocates for Fed Policy Independence in Post-Crisis Era

Killer Chart: Why a Dec. Rate Hike Is a Real Possibility
  • Defends Fed's actions in financial crisis in Washington speech
  • Says Fed is transparent and GAO audit threatens interference

Federal Reserve Vice Chairman Stanley Fischer pushed back against proposals for stricter Fed oversight, saying they were motivated by the mistaken conclusion that the central bank responded to the financial crisis inappropriately.

Legislative proposals, including one for a Government Accountability Office audit of Fed policy, "appear to be motivated by the belief that the Fed’s response during the crisis was somehow ineffective or inappropriate,” Fischer told the National Economists Club in Washington. "In fact, the Fed’s response was a carefully considered exercise of instrument independence that was effective, appropriate, and necessary in light of the congressional mandate to which it is held accountable,” he said, referring to the central bank’s freedom to choose any policy to spur growth.

In the wake of the deepest downturn since the Great Depression, the Fed cut interest rates to near-zero in 2008. It has held them there since, and also engaged in three rounds of large-scale asset purchases aimed at boosting the economy. The extraordinary policies, and the perception that the Fed poorly communicates how it makes decisions, have drawn ire from politicians and commentators.

Inflation Expectations

Fischer said the anchoring of inflation expectations despite stubbornly low price pressures is probably derived from the Fed’s freedom from political interference, along with the adoption of an explicit inflation target of 2 percent. That’s a turnaround from the problems facing central banks about four decades ago.

"The inflation problem with which most of the leading economies are dealing is inflation that is too low, not too high,” he said, adding that "we are focused to a much greater extent than in the past on the importance of financial stability."

Senator Rand Paul, a Kentucky Republican, has repeatedly proposed a GAO audit of the Fed, including in a bill this year. Paul wants to allow the agency to review and critique monetary-policy discussions and decisions.

"Since the Federal Reserve is already very transparent about its monetary policy decisions, review by the GAO would not meaningfully augment communications with the public but would instead reflect an effort by Congress to influence the Fed’s policy decisions," Fischer said Wednesday.

Revenue Source

Fischer also pushed back against using the central bank as a source of revenue to cover the cost of fiscal programs, saying that doing so would be "dangerous to its independence."

Fischer, 72, made no monetary policy prescriptions in the text of his speech. His career in economics, including a stint as governor of Israel’s central bank, spans a period from the 1970s through the 1990s during which central banks have become increasingly free of political influence.

His remarks came on a busy day for Fed speakers. Both Chair Janet Yellen and New York Fed President William Dudley said at separate events earlier on Wednesday that next month remains a possibility for the first Fed rate increase since 2006, assuming economic data between now and the Dec. 15-16 gathering show sustained strength in the economy.

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