President's Message: Should the Fed Be Made More Accountable?

Thomas C. Melzer

In recent months, we have seen a host of headlines about the Federal Reserve—"What the Fed Hasn't Said," "Gonzalez Calls Greenspan a Liar" and "Is the Fed Playing Market Games?"—that are quite provocative. Unfortunately, they are also misleading: They create the perception that the Fed is in need of greater accountability.

Currently, two major proposals are pending in Congress to reform the Fed. Both are intended to make the Fed more accountable by changing its structure. While Congressional oversight for an institution like the Fed is indeed appropriate, these proposals seek to change a system that not only works, but already ensures accountability.

When one examines the Fed's early years, one can see how Congress attempted to ensure Fed accountability in its very structure. For example, members of the Federal Reserve Board are confirmed by Congress and hold a voting majority on the Federal Open Market Committee (FOMC), the Fed's chief monetary policymaking body. The Board also oversees the activities of the 12 regional Reserve Banks and is responsible for approving Reserve Bank president selections.

At the same time, Congress clearly intended to keep the Fed independent. For example, Federal Reserve Board members serve 14-year staggered terms. In addition, Reserve Bank presidents, who are not presidential appointees, are voting members of the FOMC. These structural checks and balances ensure that the monetary policymaking process is both accountable and insulated from short-term political agendas.

Recent research shows that an independent central bank best serves the economic interests of a nation. Typically, countries with independent central banks have lower rates of inflation and higher growth in standards of living than those that do not. When monetary policy is not separate from government finance, high inflation and poor economic performance often result.

Ultimately, the economy is our primary concern, and in recent years, I think, the Fed's record speaks for itself. Monetary policy has been successful in gradually reducing inflation during a long period of moderate economic growth, and long-term interest rates are at their lowest in more than 20 years. We must be wary of proposals that, in the name of accountability, alter the Fed's structure in a way that would hamper its ability to achieve the best monetary policy. When the real issues, and not the headlines, are considered, the answer to Fed reform is simple: An independent central bank is in the nation's best interest.


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