In his final speech as president of the Federal Reserve Bank of Philadelphia, Charles Plosser Tuesday stressed the need for the central bank to remain independent so monetary policy stays free of political interference.
While some find it odd that "nonelected policymakers" set monetary policy, Plosser noted this is based on "confusion" about the term "central bank independence," which he said means the Fed should be free of "direct political interference. It does not mean, nor should it, that the central bank is not accountable for its policies."
Further, Plosser noted, the Fed's goals are set by Congress. "The goals of monetary policy are rightly a subject of legitimate debate," Plosser said, according to prepared text released by the Fed. "I have frequently argued that these goals are too broad, and they risk making the Fed responsible for more than it can actually deliver. That, from my perspective, risks undermining the Fed's credibility and invites policymakers to lurch from one goal to the next when it seems convenient, thus making it more susceptible to political pressure. As a consequence, I have favored a single mandate for the Fed - price stability - to increase the clarity of the objective and make it easier to hold the Fed accountable."
Independence becomes especially important since "monetary policy affects the economy with sometimes long and variable lags," while elected officials and the public often use a near-term outlook.
"Moreover, there can be a conflict between what monetary policy may be able to achieve over the short term versus its impact over the long term," Plosser said. "For example, in the short term, it might seem expedient or even desirable to try to spur economic growth and employment by conducting excessively accommodative monetary policy. Yet, this could lead to very bad economic outcomes in the long term, including higher inflation, higher interest rates, and an eventual tightening of policy to control inflation that may be detrimental to the economy. These outcomes would be inconsistent with the long-term goals set by Congress. Delegating the decision-making to an independent central bank that can help focus on long-term policy goals is a way of limiting the temptation for short-term gains at the expense of the future."
Plosser also noted the importance of separating "the authority of those in government responsible for making the decisions to spend and tax from those responsible for printing the money." That prevents Congress from printing money, "substituting a hidden tax of inflation in the future for taxes or spending cuts."
Turning to the "Audit the Fed" bill, Plosser said, "The bill is not really about an audit in the usual accounting or financial sense of the term, since the Fed's financial statements and indeed its operations in supervision and payment services are already subject to extensive outside audits by the GAO, the Board of Governors' Office of the Inspector General, and an outside public accounting firm. Rather, this proposal to strike that exemption for monetary policy is an attempt to reduce the independence of the central bank through the threat of a political action in real time."
Under the bill, Plosser said, whenever a member of Congress opposes a monetary policy decision, "the GAO could be called on to investigate."
Such a threat "would change the dynamics of FOMC's internal discussions and undermine the Fed's credibility and its ability to conduct monetary policy in the long-term interests of the American public."
Plosser said he supports "ongoing efforts to increase accountability and transparency, but I do not support efforts that would lead to greater political interference in monetary policy decisions. Such efforts include the audit-the-Fed movement but also those efforts that would make Reserve Bank presidents political appointees."
When making policy, "divergent views can and often do exist," on the Federal Open Market Committee, Plosser said. "Some commentators express the view that dissent causes dissonance and therefore confuses the communications. I disagree. I believe that open dialogue and diversity of views leads to better policy decisions and is the primary means by which new ideas are gradually incorporated into our monetary policy framework."
