Wednesday, November 30, 2011

Is the Fed "Independent"?

The idea of whether or not the US Fed is an "independent" entity is one that is often discussed and published views about this can often range to the conspiratorial level that somehow the Fed is not only independent but is some sort of a private entity. What does the Fed say about itself on this issue? Here from the Fed's own  Purposes and Functions Manual, Section 1:

Soon after the creation of the Federal Reserve, it became clear that the act had broader implications for national economic and financial policy. As time has passed, further legislation has clarified and supplemented the original purposes. Key laws affecting the Federal Reserve have been the Banking Act of 1935; the Employment Act of 1946; the Bank Holding Company Act of 1956 and the amendments of 1970; the International Banking Act of 1978; the Full Employment and Balanced Growth Act of 1978; the Depository Institutions Deregulation and Monetary Control Act of 1980; the Financial Institutions Reform, Recovery, and Enforcement Act of 1989; the Federal Deposit Insurance Corporation Improvement Act of 1991; and the Gramm-Leach-Bliley Act of 1999. Congress has also adopted legislation defining the primary objectives of national economic policy, including the Employment Act of 1946; the Federal Reserve Reform Act of 1977; and the Full Employment and Balanced Growth Act of 1978, which is sometimes called the Humphrey-Hawkins Act, after its original sponsors. These objectives include economic growth in line with the economy’s potential to expand; a high level of employment; stable prices (that is, stability in the purchasing power of the dollar); and moderate long-term interest rates. The Federal Reserve System is considered to be an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive branch of government. The System is, however, subject to oversight by the U.S. Congress. The Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government; therefore, the description of the System as “independent within the government” is more accurate.
So there you have it from the Fed itself; the Fed is part of the government sector. Checkmate. Except for morons.


bosscauser said...

About as independent as the Post Office.

By the way, do we really want the Congress regulating or manipulating the money supply?

Matt Franko said...


The "money supply" doesn't matter. They can manipulate it all they want, it doesnt do anything except modify the term structure of previously issued govt liabilities.

Fiscal Policy is what can make a difference.


Tom Hickey said...

"By the way, do we really want the Congress regulating or manipulating the money supply?"

Don't you trust democracy?

Right now, a small cohort with ties to the financial sector, who are unelected and unaccountable to the people, are in charge of a command system setting US monetary policy. How does that square with either capitalism or democracy?

Matt Franko said...

Right Tom,

It is actually threatening "capitalism" per your other thread... they themselves are their own worst enemies at this point.

btw I heard on the FM drive today that Jackson Browne was going to play today at 1:00 PM at OWS Liberty Park in NYC.... more music/art... this is good.

Keep on Rockin' in the "Free" World!


Hugo Heden said...

> "By the way, do we really want the Congress regulating or manipulating the money supply?"

Better to use automatic regulation (rather than discretionary) perhaps.

(Read: Job Guarantee and other automatic stabilizers.)

dave said...

Exactly. This is why Bernanke says "it would be nice if we got help from other parts of the Government..." This is something MMTers should be pushing. The mainstream line is that the Fed is somehow a private bank; members & former members of Congress believe it (witness Grayson comments the other day). And the public believes it too.

But disagree with Matt's comment above: the "money supply" does matter if considering private debt in addition to G-debt. That's a different matter though from what was being discussed.

Ryan Harris said...

"Don't you trust democracy? "

The US is a republic not a democracy because the 1% that wrote that there constertution thoughts we was too dumbs to be a votin' direct.