Is the Fed independent? Should it be independent? Has independence been an important topic in the past? More specifically, should new Fed governors be biased to economic growth, consistent with current fiscal policies over expected inflation, focus on price stability? The current discussion associated with new Fed governors is nothing new. The Fed has always fought for as much independent as possible, yet the Fed is a creature of Congress.
Investors should not forget that the Fed has been under the dictates of the Humphrey-Hawkins bill for over 40 years. The objective of this bill was to ensure that the Fed was focused on full employment as well as inflation and coordinate with the other branches of government. That was not always the case. Humphrey-Hawkins was spawned from the Civil Rights Movement. The objective was to make the Fed more focused on the public interest of employment over the inflation interests of bankers and the money class. This interesting history was described in the pamphlet “The Full Employment Mandate and the Federal Reserve: Its Origins and Importance” written by affiliates of the Center for Economic and Policy Research and the Center for Popular Democracy.
The current policy discussion is actually more than just having the president pick Fed governors that will follow his policy bidding. It is also deeper than whether the Fed will continue to lean toward growth over inflation fears. This issue is greater than change any mix between hawks and doves.
We don’t have bias on what should be done. We do have an interest in the choices made because of what will happen to financial markets. Our greatest fear is not with any specific policy bias as much as a fear that the Fed will continue to have a history of poor forecasting. The impact of forecasting mistakes will only be amplified when there is a policy extreme. A temperate Fed will mute poor forecasting. Caution is good, yet no action can be dangerous. In an uncertain world dominated by poor prediction, a tempered central bank may be best for markets. A strong bias coupled with forecast errors only means that the end result will be a more extreme market reaction when the errors are revealed.