The High Cost of the Fed’s Mission Creep
The more central bankers wander from their core mission, the more they put their independence at risk.
By Kevin Warsh
The seal of the Federal Reserve Board of Governors in Washington, Feb. 5, 2018. Photo: Andrew Harnik/Associated PressI was a member of the Federal Reserve Board of Governors more than a dozen years ago.
Nothing about the period was easy.
We made good calls and mistakes.
Inevitably, the hardest question then—and the most salient now—was the Fed’s role and responsibility.
After one particularly intense weekend that resulted in extraordinary policy support, former Chairman Paul Volcker commented that the Fed had gone “to the very edge of its lawful and implied power, transcending certain long-embedded central-banking principles and practices.”
We took that as a brush-back pitch—high and tight—from a strong institutional ally to his successors.
But Volcker’s warning has gone largely unheeded.
The Fed has assumed a more expansive role inside our government on all matters of economic policy.
In my view, forays far afield—for all seasons and all reasons—have led to systemic errors in macroeconomic policy.
The Fed has acted more as a general-purpose agency of government than a narrow central bank.
Institutional drift has coincided with the Fed’s failure to satisfy an essential part of its statutory remit, price stability.
It has also contributed to an explosion of federal spending.
And the Fed’s outsize role and underperformance have weakened the important and worthy case for monetary-policy independence.
U.S. fiscal policy is on a dangerous trajectory.
Irresponsible spending surged, especially in the aftermath of the pandemic.
I struggle to absolve the Fed of the nation’s fiscal profligacy.
Fed leaders encouraged government spending when times were tough but didn’t call for fiscal discipline at the time of sustained growth and full employment.
I’d prefer monetary policymakers to steer clear of fiscal commentary.
But if the Fed chooses to cross the line, there should be real and rhetorical symmetry.
The Fed has been the most important buyer of U.S. Treasury and other federal debt since 2008.
The Fed’s $7 trillion balance sheet is nearly an order of magnitude larger than the day I joined.
It’s a proxy for the Fed’s growing imprimatur on the economy.
I bear some responsibility for the creation of asset purchases, known more commonly as quantitative easing.
In the 2008 crisis, we cut interest rates to near zero and sought new ways to make monetary policy looser and bring liquidity to illiquid markets.
I strongly supported this crisis-time innovation, then and now.
But when the crisis ended, the Fed never retraced its steps.
I worried mightily in the summer and fall of 2010—a time of strong growth and financial stability—that the decision to buy more Treasury bonds would involve the Fed in the messy political business of fiscal policy.
QE2 was announced.
I disagreed and resigned from the Fed soon after.
QE—with some fits and starts in the 2010s—has become a near-permanent feature of central bank policy.
Members of Congress found it easier appropriating money knowing that the government’s financing costs would be subsidized by the central bank.
The line between the central bank and the ostensible fiscal authority has grown harder to identify.
Central bank vanities aren’t limited to monetary policy.
“Climate change” and “inclusion” are politically charged issues.
The Fed has neither the expertise nor the prerogative to make political judgments in these areas.
A couple of examples: First, in late 2020 the Fed joined the Network of Central Banks and Supervisors for Greening the Financial System.
The Fed said it is “active, and in many cases, plays a leading role in climate related work.”
Fast-forward to January 2025—in a somewhat different political environment—and the Fed withdrew from the “greening” group, and changed its tune.
Second, in August 2020 the Fed announced a newfangled monetary-policy framework.
In my view, the new regime was the Fed’s “end of history” declaration that high inflation was vanquished and the dominant risk was that prices would be too low.
As part of the new regime, the Fed redefined its legislative remit of “maximum employment” as a “broad-based and inclusive goal.”
The new nomenclature of “inclusive employment” was understood to underscore the Fed’s willingness to accept higher inflation so that certain groups would achieve higher rates of employment.
More recently, Fed leadership has sounded considerably more ambiguous whether the Fed’s new definition of full employment was different from the old.
If it’s no different in practice, then was the new language simply a political nod?
If the new definition is different, then shouldn’t Congress have some say?
I should also note the Fed misjudged the economics: The steepest price of its new policy has been paid disproportionately by the supposed beneficiaries.
The more the Fed opines on matters outside its remit, the more it jeopardizes its ability to ensure stable prices and full employment.
For about 40 years, Americans scarcely thought about changes in the price level.
If the Fed’s enviable track record of price stability had continued through this decade, central bankers may have been granted wider berth.
But then the Fed foundered on fundamentals and inflation surged.
Stable prices were the Fed’s plot armor.
As in the movies, it was protection for the protagonist against those who would dare a challenge.
The Fed’s roving remit and grand ambitions, however, expanded its surface area and exposed its vulnerability even more.
Central-bank independence is more often cited than defined.
Independence isn’t a policy goal unto itself.
It’s a means of achieving important and particular policy outcomes.
Independence is reflexively declared when any Fed policy is criticized.
Congress has granted important functions to the Fed in bank regulation and supervision.
I don’t believe the Fed is owed any particular deference in bank regulatory and supervisory policy.
Fed claims of independence in bank matters undermine the case for independence in monetary policy.
And when the Fed turns away from its creed and tradition, exercising powers that are the province of the Treasury Department, or taking positions on societal issues, it further jeopardizes its operational independence in what matters most.
I strongly believe in the operational independence of monetary policy as a wise political economy decision.
And I believe that Fed independence is chiefly up to the Fed.
That doesn’t mean central bankers should be treated as pampered princes.
When monetary outcomes are poor, the Fed should be subjected to serious questioning, strong oversight and, when they err, opprobrium.
Our constitutional republic accepts an independent central bank only if it sticks closely to its congressionally directed duty and successfully performs its tasks.
We should remember that the revealed preference of the body politic is a deep distaste for inflation—and for bailouts and power grabs.
The Fed’s current wounds are largely self-inflicted.
A strategic reset is necessary to mitigate losses of credibility, damage to its standing and—most important—worse economic outcomes for our fellow citizens.
Editor’s note: The following are excerpts from a speech delivered on April 25 by Kevin Warsh to the Group of Thirty and the International Monetary Fund. Mr. Warsh was a member of the Federal Reserve Board of Governors, 2006-11, and is a distinguished fellow in economics at the Hoover Institution.
0 comments:
Publicar un comentario