Last week, I ruffled some feathers when I argued that the Federal Reserve Transparency Act is likely to create more problems than it solves for monetary policy. It seems like there’s a lot of disagreement that is based on misinterpretations or misunderstandings of what I said. So, in the interest of good faith debate, I would like to clear up some misconceptions about my case against the Federal Reserve Transparency Act.
First, let’s start off with some plain misreadings. James Caton, a teaching assistant and graduate student in economics at George Mason University states at Money, Markets, and Misperceptions that “Wheeler has chosen a poor time to defend a lack of transparency at the Fed.” However, a casual reader should notice that I stated in the first paragraph of my article, “More transparency in monetary policy and a clearer definition of the Fed’s powers are clearly needed.” I went on to say that increasing accountability and transparency is a “worthy cause.” Clearly, I am not against transparency. However, I am against the FRTA because while it provides transparency, it also gives Congress more influence over monetary policy by removing restrictions on auditing the internal communications and policy deliberations. I don’t think the transparency is worth creating a more politically motivated central bank.
Phil Magness, a historian over at the Institute for Humane Studies, made a post on Facebook, accusing me of “taking the Fed at its own word that it is “independent” and long-run oriented” while Steve Horwitz, Austrian Economist at St. Lawrence University, claimed in his own Facebook post that I am being a “tool for the powerful” for the same reasons. Here’s the rub with those claims: I never claimed that the Federal Reserve is completely independent from politics. Although I didn’t go into detail, my article does mention the valid concerns over the current politicization of the Fed. As explained by Goodman (1991), “Independence is a continuous, not dichotomous, variable.” I can see how my emphasis on independence might have been misunderstood as ignoring the nuances of political influences. However, that was not my intention. What I said was that the Federal Reserve was designed to be as independent as possible for a good reason, and that this legislation will only make monetary policy more directly subject to the whims of politicians.
In his Facebook post, Magness linked a lot of sources about the political influence on the Fed as if current problematic political influences on the institution justifies adding more political influence. Call me crazy, but I am not convinced. There is evidence that judicial decisions are subject to political influence. Should we also believe this can be resolved by congressional meddling in those decisions?
Second, let’s talk about the willful misreadings and leaps of logic that have abounded in the wake of my article. It should be obvious that just because I am opposed to this particular bill does not mean I am opposed to all attempts to reform the Federal Reserve. Although I mentioned inflation targeting, I am open to the possibility of other research-supported alternatives. I don’t claim to know exactly what framework should be adopted. However, creating a research-based framework is not what the FRTA does and is certainly not the focus of the proponents of this bill.
Instead, the proponents have focused the discussion around ending the Fed and giving monetary policy control back to Congress. Representative Paul Broun, who introduced the FRTA, actually criticizes the fact that Congress was not allowed to vote on Federal Reserve policy actions and said “Congress needs to take that power back.” Suppose this bill passes. Are we supposed to just trust Congress to use this increased power to improve monetary policy?
Finally, I have been criticized for using academic research published by the Fed. However, the same people who reject the Fed’s research could be said to have an ideological bias, but that doesn’t warrant the dismissal of their research. I see no reason why both are not equally credible. Unless the critics can demonstrate a particular issue with the methodology used in the research, I will stand by its validity. However, if the research I originally cited isn’t enough to convince you of the pitfalls of allowing more congressional influence over monetary policy, here is another academic paper that explains how greater independence helps minimize political pressures and points to the supporting body of research, such as Cukierman (1992) , Fischer (1995) , and Maloney, Pickering, and Hadri (2003). In fact, when the IGM Panel of Economic experts was surveyed regarding a similar bill, 70% disagreed with the idea that this type of audit would improve the Fed’s legitimacy without hurting its decision making.
To come back to the critiques of my piece, Caton’s recommendation that “we implement both a good policy rule and framework for transparency” does not seem to be at odds with my position—when you read what I said properly—but, of course, that depends on the specifics of the legislation.
I appreciate his and others’ valuable input on the potential for nominal income targeting as an alternative to inflation targeting. However, I hope in the future that those who comment will abandon the personal insults which add nothing to the policy debate. As I stated in my original article, what we need are reasonable alternatives with a solid economic basis to make progress towards resolving the problems. Libertarians and other proponents of reforming the Federal Reserve shouldn’t just support any and all legislation with that aim. The piece of legislation we have is not good enough—we should aim for the best.
Note: I apologize for incorrectly stating a former university of Steve Horwitz. This article has been updated with the current information.