- Cafe Hayek - https://cafehayek.com -

Power and politics at the Fed

Tweet [1]

The latest EconTalk is Michael Belongia talking about power and politics at the Fed [2]. Here is Scott Sumner’s very nice summary [3] and analysis of Belongia’s views (as well as Scott’s take):

1.  The Fed should have a single nominal target.

2.  The Fed needs to be transparent and have specific and well-defined monetary policy goals.

3.  The Fed should focus only on monetary policy, and regulation of the large banks.

4.  Fed research should include more voices that dissent from current Fed decisions.  (Yes, I know that some of the branches have divergent theoretical approaches (i.e. RBC), but I am talking about the sort of critique you see in the blogosphere.)  I’d like to see more studies that challenge the focus on interest rate targeting.

5.  I agree with Michael that the fed funds rate is a target, not a policy instrument, (although I erroneously called it an instrument at times), and it is not the appropriate target.

6.  I agree that there should be just 5 Fed branches: NYC, Atlanta, Chicago, Dallas and SF.

7.  I agree that Fed should stop doing research on issues unrelated to money and banking.

8.  I agree that we need better data from the Fed.

The podcast focuses on 1,4, and 5. I learned a lot from this podcast. It reminded me that the Fed is a bureaucracy with power and politics coming along for the ride. What the Fed should do is keep prices stable. But the other stuff is too tempting for both the Chair of the Fed and Congress. So the Fed does lots of other things that it pretends to be good at.