In “Federal Reserve Independence in the Aftermath of the Financial Crisis: Should We Be Worried?” former Federal Reserve Vice Chairman Donald Kohn writes that Federal Reserve independence is at risk, thanks to the dramatic actions that it had to take during and after the global financial crisis. Kohn says keeping the central bank independent from elected politicians is crucial: Across time and across countries, there’s plenty of evidence that less independence leads to more inflation.
Kohn lists four risks to the Fed’s independence:
- Political polarization has “not proven conducive to reasonable discussion of monetary policy and the pros and cons of independence.”
- The Dodd-Frank financial reform law trimmed some of the Fed’s powers, an indication of the erosion of trust in and deference to the central bank.
- The Fed will likely be prone to political pressure once it begins raising interest rates.
- The Fed has been given added responsibilities to restrain the financial system in order to avoid another financial crisis, which could require it to institute unpopular rules such as discouraging certain mortgages.
Todd Stern speaks at The Economist’s Climate Risks Summit.