That is what Alan Blinder tells us in a Washington Post column today. Blinder tells us that the vast majority of academic economists and people in the financial industry oppose efforts to make the Fed more accountable to Congress. (He also bizarrely asserts that "very, very few" people support more congressional control of the Fed. This would seem to be inconsistent with the support for the Paul-Grayson bill to audit the Fed.)
Blinder tells us why more congressional input into monetary policy would be a bad thing. He notes that the Fed will start to raise interest rates at some point when the economy starts to recover. He then presents the hypothetical scenario: "Would we like to see the FOMC members called on the congressional carpet to explain why they are 'killing jobs'?"
Very good question. Just about everyone I know would say "yes." As phone records for Treasury Secretary Timothy Geithner from his days as president of the New York Fed show, Fed officials are in constant contact with top figures in the financial industry. There is no doubt that they would loudly hear the complaints from the industry if they were not raising interest rates fast enough to meet the industry's concerns about inflation.
The financial industry tends to be more concerned about inflation than the rest of us. While there is a large body of research that shows that modest rates of inflation (3-4 percent) have little negative economic effect,
the financial industry holds large amounts of fixed rate long-term debt. This debt loses value even if there are just small increases in the rate of inflation. For this reason, the financial industry tends to be much more vigilant in opposing inflation than manufacturing or other industries or the public at large, who may benefit from seeing the real value of mortgages and other debt eroded. Given the excessive influence of the financial industry on Fed policy, it would be perfectly reasonable for those not tied to the industry to desire a countervailing force on Fed policy.
It is also worth noting in this context the Fed's propensity to error on the side of excessive tightness. In the mid-90s, most of the members of the Board of Governors wanted the Fed to raise interest rates because they argued that the unemployment rate was getting too low. At the time, the unemployment rate was 5.6 percent, the level that most academic economists viewed as consistent with a stable rate of inflation.
Alan Greenspan, who was not an academic economist, argued that there was no evidence of inflation in the economy, in spite of the relatively low unemployment rate. He insisted on keeping interest rates low and allowing the unemployment rate to fall. The unemployment rate did eventually fall to 4.0 percent, with little perceptible uptick in inflation. This allowed for the first period of sustained real wage growth for most workers since the 60s. However, these gains were only possible because of the quirkiness of Greenspan's economic outlook and his extraordinary prestige at the time as Fed chairman.
--Dean Baker
