The premise of central bank independence per se has little to do with Anglo-American economics. It is as necessary in the United States and the United Kingdom as it is in Germany or in China and Russia if economies are to be managed responsibly and politically sensibly, in a time consistent manner.
Economic policy is inherently political and given the pocketbook sensitivities of day-to-day living and the associated political ramifications, whatever the political system of a country, responsible management of money supply is critical. Time consistency in economic management as manifested in the independence of the monopoly function of supplying money to the economy from political winds is universal, not only Anglo-American.
As is currently instituted, the statutory independence of the Federal Reserve and the Federal Reserve being a separate institution from the rest of the government are synonymous, though they need not necessarily be. Governor Warsh’s speech is largely written in this context and therefore, to some extent is self-serving to the institutional interests of the Federal Reserve given its recent close scrutiny by the Congress.
Kevin Warsh is correct that the conduct of monetary policy must be independent from the rest of the government. The elected officials, by law, cannot ask the Federal Reserve to make monetary policy a certain way. However, that statutory insulation from the rest of the government, as the Fed governor duly recognizes, does not also prevent the elected officials from reviewing monetary policy conduct after it has been conducted. The vehicle for such review is the Fed’s public semi-annual monetary policy report.
At the time of reporting, the committees in the United States Congress charged with the Fed’s oversight per law, can query its Chairperson to explain why monetary policy was conducted the way it was. And the Fed owes a formal public explanation. The Congress can also seek both public and non-public documents from the Fed as evidence of the Fed’s explanation of the conduct of monetary policy and can ask the Fed why some information is public while the other is not, even if that means a closed-door hearing, as is often the case with other government agencies.
More importantly, the primary vehicle of policy transparency as Governor Warsh appears to be implying implicitly, is the structure of policy itself: the Fed may not be able to adequately contain inflation expectations if its inflation target is implicit. Though he is not suggesting that it be made explicit, the thrust of his statement cannot be any clearer.
On the matters of financial regulation, consumer protection and other responsibilities of the Fed, he appears to be more willing to yield to government scrutiny while keeping those functions inside the Fed. He is consistent with the zeitgeist of political correctness inside the institution to retain the turf of the Fed if not expand it, but this does not mean that it must be taken under advisement by the government, because that debate is still, quite appropriately, alive until financial regulations are reformed to the satisfaction of all the stakeholders. And this could mean, at the end of the day, the Fed being charged with the sole responsibility of providing money to the economy only, under its current mandate, and employing an explicit inflation targeting policy regime which does not require legislative intervention.
The structure of the Federal Reserve in the context of its independence within the government as he points out, however, always intrinsically involves a fiscal-monetary mix given how monetary policy is made: the Fed only buys and sells treasury bonds, except under exceptional circumstances, whatever name it may give to those operations. There can be no monetary policy without fiscal policy.
The choice of when to employ monetary and fiscal policies is a matter of policy judgment and not a bright rule, because sometimes, as is the case with the liabilities of government sponsored enterprises (GSEs) or other financial institutions, exposing the balance sheet of the United States government through new debt issuances could mean inflation and a devalued currency, if not a debt or currency crisis or both. Though this eventuality may not afflict the United States as easily as it had other countries given the size of the U.S economy and the predominant global role of the U.S dollar, complacency must not prevent wise policy choices.
Central bank independence is not institutional or policy insulation but dynamic interdependence between the various instruments of economic policy at the disposal of a nation’s government, all working in coherence and concert to achieve the objectives of economic growth, full employment, stable prices and a stable currency.