Head to head: Monetary policy should be separate from politics for economy’s health

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The 2008 recession has brought monetary policy into the spotlight and, as a result, the job approval of the Federal Reserve Chair may be more political than ever. In addition to “keep(ing) the U.S. economy afloat,” the Fed’s first female chair – Janet Yellen – can now add, “manage partisan bickering” to her to-do list.

Since the onset of the recession, Federal Reserve policies have been decisively (and successfully) implemented to help stimulate the economy and save it from certain doom. But what are the consequences of these policies, and when will it be time to pull the plug on certain policy measures? Though this economic debate has been raging since long before Yellen assumed office on Feb. 3 of this year, the politically-charged fireball now rests squarely on her desk.

Though the occasional brutal Congressional Hearing has been a mainstay in the life of a Fed Chair (just ask previous chairman, Ben Bernanke), the Federal Reserve Bank is, and must remain, an independent governmental agency insulated from political pressures that can lead to short-term thinking and damaging results.

This long-understood notion, however, is lost on some members of the U.S. House of Representatives, who are currently proposing a bill to intervene in the Fed’s status as, “independent within the government.”

The bill, H.R. 5018, would require the Fed to implement a specific formula to determine short-term interest rates.

No doubt, H.R. 5018 comes as a response to the bank’s current low-interest rates and the other measures taken to increase money supply. The current rates were set as part of the Fed’s action to stimulate the economy following the recession of 2008, and many on the ideological right have warned that these policies were leading the country toward massive inflation. Their warnings have persisted for over five years, despite assurances to the contrary from economists the likes of Bernanke and Yellen.

However, the truth is that for all the fear they’ve been peddling over these past five years, none of it has come to fruition. So, at a time when Chair Yellen has been proposing new measures to address the unemployment crisis in the economy, House Republicans would prefer to tie the Fed’s hands to a formula that offers no flexibility or basis on the actual economic circumstances outside of a few specific numbers.

“It is utterly necessary for us to provide more monetary policy accommodation than those simple rules would have suggested,” Yellen said in a hearing before the House Financial Services Committee.

She went on to point out that if the formula had been in place in previous years, the recession would be even deeper.

It seems imprudent to push for a formula when some of the world’s best economists monitor the situation and set policies that are free from hidden agendas and monied interests that motivate our politicians, especially those who stand to gain from higher interest rates. If I could have picked anyone to lead the charge on monetary policy during the “Great Recession,” it would have been Bernanke, the Ph.D. economist recognized for his research on the Great Depression. And that decision has clearly paid off, considering that we are no longer teetering on the brink of total economic collapse.

This bill is a shining example of why the Federal Reserve Bank must retain its independence from political turmoil. Rather than hard and fast rules, the Fed must be allowed discretion to dictate short-run policies, not rely on political whims. Only then can it effectively fulfill its dual-mandate to increase employment while keeping a steady eye on the value of the dollar.

Ultimately, the U.S. central bank is accountable to the public and subject to the inquiries of Congress, but this legislation looks less like “Congressional oversight” and more like Congressional control. The timing is especially harmful, given that the merits of the formula being discussed remain questionable at best, and there is more we could be doing to combat unemployment.

Theo Stavropoulos is a recent graduate in human resource management and poetical science. Please send comments to opinion@kstatecollegian.com.

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