Fed chair­man stresses the im­por­tance of in­de­pen­dence

Stamford Advocate (Sunday) - - Business -

Fed­eral Re­serve Chair­man Jerome Pow­ell warned last week the Fed’s in­de­pen­dence from po­lit­i­cal pres­sure must be re­spected if it is to suc­ceed in con­trol­ling in­fla­tion, max­i­miz­ing employment and reg­u­lat­ing the fi­nan­cial sys­tem.

His re­marks Fri­day came af­ter Kevin Warsh, a for­mer Fed of­fi­cial who Pres­i­dent Don­ald Trump in­ter­viewed for the chair­man post, said in an in­ter­view ear­lier this month with Politico that Trump did not ap­pear to view the Fed as an in­de­pen­dent body. He said Trump was di­rect about how he thought in­ter­est rates should be man­aged.

Pow­ell, in a speech in Stockholm, warned against tak­ing that in­de­pen­dence for granted given its re­cent suc­cess in keep­ing in­fla­tion low.

“We must not for­get the lessons of the past, when a lack of cen­tral bank in­de­pen­dence led to episodes of run­away in­fla­tion and sub­se­quent eco­nomic con­trac­tions,” Pow­ell said in pre­pared re­marks.

Fol­low­ing Warsh’s com­ments re­gard­ing Trump, mem­bers of the Se­nate Bank­ing Com­mit­tee quizzed two of Trump’s nominees for the Fed­eral Re­serve Board, Richard Clar­ida and Michelle Bow­man, about the im­por­tance of Fed in­de­pen­dence.

Both said yes when asked by Sen. Sher­rod Brown, D-Ohio, whether they thought it was im­por­tant for the Fed to re­main free from White House in­flu­ence. Clar­ida said nei­ther Trump nor any other mem­ber of his ad­min­is­tra­tion had said any­thing dur­ing his in­ter­views that would be com­pro­mis­ing to the Fed’s in­de­pen­dence.

“I had a num­ber of meet­ings over sev­eral months with a num­ber of of­fi­cials, in­clud­ing the pres­i­dent, and in no meet­ing, at no time, did I ever have any rea­son to ques­tion the in­de­pen­dence of the Fed­eral Re­serve,” Clar­ida said then.

The dou­ble-digit in­fla­tion of the late 1970s is of­ten blamed, in part, on then-Fed­eral Re­serve Chair­man Arthur Burns, who was re­luc­tant to raise short-term in­ter­est rates high enough to choke off in­fla­tion for fear of caus­ing mas­sive un­em­ploy­ment.

Burns and other Fed of­fi­cials were pres­sured by Pres­i­dent Richard Nixon, who was leery of any po­lit­i­cal blow­back from ris­ing un­em­ploy­ment.

In­fla­tion re­mained high into the early 1980s un­til Paul Vol­cker, ap­pointed Fed chair­man by Pres­i­dent Jimmy Carter, pushed short­term in­ter­est rates to nearly 20 per­cent.

That sparked a sharp re­ces­sion, but it also reined in in­fla­tion.

Pow­ell spoke at a con­fer­ence cel­e­brat­ing the 350th an­niver­sary of the Riks­bank, Swe­den’s equiv­a­lent of the Fed.

The Fed is also fo­cused on mak­ing its ac­tions trans­par­ent, Pow­ell said, in or­der to bol­ster pub­lic sup­port. That has in­creas­ingly im­por­tant at a time when “trust in govern­ment and pub­lic in­sti­tu­tions is at his­toric lows,” he said.

Re­search has shown that an in­de­pen­dent cen­tral bank typ­i­cally does a bet­ter job reg­u­lat­ing banks and the broader fi­nan­cial sys­tem, Pow­ell said.

“There can be no macroe­co­nomic sta­bil­ity with­out fi­nan­cial sta­bil­ity,” he said.

Bloomberg

Jerome Pow­ell, cen­ter, chair­man of the U.S. Fed­eral Re­serve, speaks at a con­fer­ence to cel­e­brate the 350th an­niver­sary of the Riks­bank in Stockholm, Swe­den, on Fri­day.

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