E US Government Is Beholden To The Fed; And Vice-Versa

The Federal Reserve began operations in the year 1913. Its origin is steeped in controversy and intrigue. The term conspiracy has been used to describe its birth and its existence, and similar accusations have been employed to describe its purpose and actions.

We don't hear much about that today. But we do hear quite a bit about the issue of Federal Reserve independence. The crux of the argument usually centers on monetary policy executed by the Fed versus opinions of politicians and others who want and expect something different, which they believe will provide more favorable results.

President Trump has been ardently vocal lately in demanding that the Fed be more aggressive in cutting interest rates.  He also wants and is encouraging, action that would result in a weaker US dollar. He believes that it would be good for American businesses. His reasoning is that a weaker US dollar would make American-made goods more competitive.

Whether or not the President is correct doesn't matter for purposes of this article. What is important is that there is a wide difference of opinion between the Federal Reserve and its current policies (re: Jerome Powell) as compared to the wishes of the United States government (re: President Trump).

Highly publicized verbal jabs have provoked additional discussion on the subject of Fed independence. Implications of the use of Presidential power to force a change have not gone unnoticed. The Fed chairman has been equally forthright in his resolve:

  • “We never take into account political considerations. There’s no place in our discussions for that. We also don’t conduct monetary policy in order to prove our independence,”...Jerome Powell

Public disagreement about Fed policy between a President and the Fed chair is nothing new. It has happened historically with nearly every Fed chair. Last week, four former Fed chairs (Volker, Greenspan, Bernanke, Yellen) spoke out in unison regarding their opinion on the subject of Federal Reserve independence:

“We are united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons”

Who's right? If the Fed is "act(ing) independently and in the best interests of the economy" why should they be subject to continual second-guessing at every turn?

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Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and  more

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