Paper Example on Fed Independence

Senator Christopher Dodd and Representative, Ron Paul introduced separate bills in Congress that sought to regulate the activities and policies of the Federal Reserve. Senator Dodds bill proposed to strip the Federal Reserve of its regulatory authority and instead limit its function to informing the monetary policy to ensure economic growth (Appelbaum & Dennis, 2009). Pauls bill, on the other hand, sought to direct the Fed to permit its monetary policy to be audited by Congress through the GAO (Government Accountability Office) (Andrews, 2009). These bills have caused an uproar of protest, notably from the banking industry and others because if these were passed into law, the independence of the Fed would be curtailed significantly. Personally, I believe the Fed should stay independent of government for two reasons: Impact of government control and budgetary concerns. These reasons are all tied to the economic growth of the country and the inflation rates.

Allowing government control on the monetary policy may serve to lower the rate of unemployment (as many politicians usually promise the public when vying for office). As empirical evidence and economic theories show, the effect is usually short-term and in future, there will come to be higher interest rates and inflation. The monetary policy can be manipulated by the politician to work in their favor, for example when seeking reelection, say by altering the money supply, which has a long-term effect of raising inflation rates (Thoma, 2009).

Government control can also result in increased debt. This can be illustrated by the relationship among raising taxes, printing new money, and public borrowing. The government can hesitate to raise taxes if it believes doing so would result in poor political outcomes. Hence, to finance its operations, the government may resort to raising its debt or increase the supply of money by printing new money. This causes inflation rates to escalate.

Thus, the Fed should retain its independence because it implies that its monetary policy will be safe from political manipulation. This independence will also prevent the monetization of the countrys debt, a practice that has far-reaching consequences on the inflation rates.

References

Andrews, E. L. (2009, November 10). Under Attack, Fed Chief Studies Politics. Retrieved 2017, from The New York Times: http://www.nytimes.com/2009/11/11/business/11fed.html?_r=1

Appelbaum, B., & Dennis, B. (2009, November 11). Legislation by Senator Dodd would overhaul banking regulators. Retrieved 2017, from Washignton Post: http://www.washingtonpost.com/wp-dyn/content/article/2009/11/09/AR2009110901935.html

Thoma, M. (2009). Money Watch: Why the Federal Reserve needs to be independent. Retrieved 2017, from CBS: http://www.cbsnews.com/news/why-the-federal-reserve-needs-to-be-independent/