More than 175 prominent economists, warning that "the independence of U.S. monetary policy is at risk" because of attacks on the Federal Reserve, are urging Congress and the president to "avoid compromising [the Fed's] ability to manage monetary policy as it sees fit" and to refrain from politicizing its decisions on emergency loans to financial institutions.
The 185-word petition was launched at a recent meeting of academic economists amid stiff congressional criticism of the Fed's actions during the financial crisis and Chairman Ben Bernanke's handling of, among other things, Bank of America's hesitation late last year to consummate its purchase of Merrill Lynch and unusual Fed loans to American International Group.
The move to publicly defend the Fed's role reflects growing unease among academic economists, former Fed officials and some investors that the vehemence of the criticism from Congress of the Fed's handling of the financial crisis suggests a readiness in Congress to weaken the freedom the Fed has to move interest rates as it sees fits.
"This was triggered by two concerns," said Anil Kashyap, a University of Chicago finance economist who was among the initiators of the petition. "The interactions with Congress are becoming increasingly hostile. Competent monetary policy needs to be forward looking. So at some point the Fed is going to have to act to tighten policy before the economy is booming. If that gets stopped for political reasons it would be a disaster and just the perception that it might be stopped could be costly."
Arguing, as economists commonly do, that the independence of the central bank is "essential for controlling inflation," the petition urges Congress not to interfere when the Fed decides to raise short-term interest rates or reverse its purchases of Treasury debt and mortgage-backed securities, which will tend to push up longer-term interest rates.
"Sooner or later, the Fed will have to scale back its current unprecedented monetary accommodation," the statement said. "When the Federal Reserve judges its time to begin tightening monetary conditions, it must be allowed to do so without interference," the economists said.
The economists' statement also raised the possibility that proposals to reshape the Fed or alter its current governance could erode confidence in its ability to thwart inflation.
"Calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery," it said. Among other things, some members of Congress have proposed to extend the powers of the General Accounting Office, the investigative arm of Congress, to audit Fed monetary policy and others have questioning the legitimacy of the governance of the 12 regional Federal Reserve banks, which are overseen by private-sector boards of directors, the majority of whom are chosen by local commercial banks.