Should the Federal Reserve Remain Independent?

As the Federal Reserve prepared to slash interest rates again yesterday afternoon, it seemed a good time to point out that this was a move born out of either despair or favoritism: despair in the face of an intractable financial crisis, or favoritism to bail out some choice names among investment banks.

Either way, stepping back and considering the context is useful. So we will simply remind readers of the following:

In 2007 so far, the US dollar has weakened 11% against the Euro, a huge and perhaps unprecedented move for the greenback. Most of the weakness occurred in the past few months as the Fed embarked on its new round of cuts.

In 2007 so far, the price of crude oil has risen a stunning 45%. Again most of this move occurred in the past few months. Mr. Bernanke deserves a warm holiday greeting card from Vladimir Putin, Mahmoud Ahmadinejad, Hugo Chavez and other leaders of oil shamocracies.

This certainly begs the question: Is a recession really so bad when compared to the dangers our country now faces from adversaries that are growing more powerful by the day?

We may be seeing the limits of Fed independence. The Fed has no geopolitical or strategic mandate. Its job is to fight inflation, with an eye on growth. But its actions have the ability to undermine our country's strategic standing in the world. Giving us growth without inflation is fine, but it is not enough while we are losing ground on a host of other measures.

Or as Martin Hutchinson puts it in his latest column:

"If asked which would be most damaging to the US economy: an oil price of $120 combined with a Federal Funds rate of 3% or an oil price of $60 combined with a Federal Funds rate of 6%, almost all economists would confirm that the former combination is likely to be much more damaging."

We saw it coming. Read also: Who's Running the Fed?, Dear Lord, Give Us a Recession!, Bidding Farewell to the Dollar

Comments

[Phil Anthropy:]

Perhaps a better question to ask is not whether the Fed should be independent, but whether the U.S. government remains independent or is instead a servant of the international banking system, of which the Fed is a for-profit part.

2007 Dec 13 12:37 AM