I will address three main points. First, the Federal Reserve’s monetary policy independence is an important and widely supported institutional arrangement that has served the American public well. Second, the Fed must continually earn that independence by using our tools to achieve assigned goals of maximum employment and price stability, and by providing transparency to facilitate understanding and effective oversight by the public and their elected representatives in Congress. Third, we must “stick to our business” and not be sidetracked in pursuit of perceived social benefits that are not closely tied to our goals and legal authorities.
Independence and transparency of the central bank
Regarding the first point, the argument in favor of the independence of monetary policy lies in the benefits of insulating monetary policy decisions from short-term political considerations.one Price stability is the foundation of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high may require measures that are not popular in the short term, as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without considering current political factors. I think the benefits of independent monetary policy in the US context are well understood and widely accepted.2
In a well-functioning democracy, important public policy decisions must be made, in almost all cases, by the elected branches of government. Grants of independence to agencies should be extremely rare, explicit, narrowly circumscribed, and limited to those issues that clearly warrant protecting short-term political considerations.
With independence comes a responsibility to provide the transparency that allows for effective oversight by Congress, which, in turn, supports the Fed’s democratic legitimacy. At the Fed, we treat this as an active responsibility, not a passive one, and during Over the past few decades we have steadily expanded our efforts to provide meaningful transparency about the basis and consequences of decisions we make in the service of the American people. public. We are very focused on achieving our statutory mandate and providing useful and appropriate transparency.3
Fulfill our mandate
It is essential that we stick to our statutory goals and authorities, and that we resist the temptation to broaden our reach to address other important social issues of the day.4 Taking on new targets, however valuable, without a clear legal mandate would undermine the case for our independence.
Also in the area of bank regulation, the Fed has a degree of independence, like the other federal bank regulators. Independence in this area helps ensure that the public can be confident that our supervisory decisions are not influenced by political considerations.5 Today, some analysts question whether incorporating perceived risks associated with climate change into banking supervision is appropriate, sensible, and consistent with our existing mandates.
It seems likely that addressing climate change will require policies that would have significant distributional and other effects on firms, industries, regions, and nations. Policy decisions to directly address climate change must be made by the elected branches of government and therefore reflect the will of the public expressed through elections.
At the same time, in my view, the Fed has limited, but important, responsibilities with respect to weather-related financial risks. These responsibilities are closely linked to our banking supervision responsibilities.6 The public reasonably expects supervisors to require banks to understand and properly manage their material risks, including financial risks from climate change.
But without explicit legislative legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.7 We are not, and will not be, a “climate policy maker.”
Alesina, Alberto and Lawrence H. Summers (1993). “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence”, Money, Credit and Banking Magazine, vol. 25 (May), pp. 151-62.
Bernanke, Ben S. (2010). “Central Bank Independence, Transparency, and Responsibility,” speech delivered at the International Conference of the Institute for Monetary and Economic Studies, Bank of Japan, Tokyo, Japan, May 25.
Board of Governors of the Federal Reserve System (2022). “The Federal Reserve Board invites public comment on proposed principles that provide a high-level framework for the safe and sound management of weather-related financial risk exposures for large banking organizations,” press release , December 2.
Crowe, Christopher, and Ellen E. Meade (2008). “Independence and Transparency of the Central Bank: Evolution and Effectiveness”, European Journal of Political Economy, vol. 24 (December), pp. 763–77.
Debelle, Guy, and Stanley Fischer (1994). “How Independent Should a Central Bank Be? (PDF)” on Goals, Guidelines and Constraints Faced by Those Responsible for Monetary Policy, Proceedings of a conference held in North Falmouth, Massachusetts, June 1994. Boston: Federal Reserve Bank of Boston, pp. 195-221.
Rogoff, Kenneth (1985). “The Optimum Degree of Commitment to an Intermediate Monetary Goal”, quarterly magazine of economics, vol. 100 (November), pp. 1169-89.
Tucker, Paul (2018). Unelected power: the search for legitimacy in central banking and the regulatory state. Princeton, NJ: Princeton University Press.
1. In recent decades, support for arrangements in which central banks made monetary policy decisions in pursuit of legislated objectives of economic and price stability has been bolstered by theoretical and empirical research contributions, including that of Kenneth Rogoff, on the benefits of the central bank. independence. See Rogoff (1985), as well as the discussion below of the distinction between goal independence and instrument independence. For empirical evidence on the topic, see Alesina and Summers (1993), as well as the subsequent research literature from the last three decades, including Crowe and Meade (2008). Bernanke (2010) and Tucker (2018) provide an overview of the development of central bank independence. back to text
2. Our situation is different from that of the European Central Bank, whose independence is listed in Article 130 of the Treaty on the Functioning of the European Union, which is available in the European Union at https://lexparency.org/eu/TFEU/ ART_130. back to text
3. We continue to strive to improve our transparency. During my five years as chairman, I pursued this goal by extending post-meeting press conferences to all FOMC meetings and instituting an ongoing personal dialogue with policymakers. This ongoing dialogue goes well beyond my regular, statutory testimony in which I report to congressional committees that have oversight responsibilities for monetary policy. back to text
4. Although the Federal Reserve has been independent since its creation in 1914, its dual mandate only became part of the law in 1977 (see Bernanke, 2010). The existence of the dual mandate reflects the fact that the Federal Reserve’s monetary policy independence corresponds to operational or instrumental independence, rather than objective independence. See Debelle and Fischer (1994) for a discussion of the distinction between types of independence. back to text
5. Like our monetary policy independence, our independence in this area comes with a high level of transparency about our policies and procedures. back to text
6. For more details, see Board of Governors (2022). back to text
7. While US monetary policy has the dual mandate of maximum employment and price stability, some other central banks have somewhat more expansionary mandates. The Bank of England and the European Central Bank have the primary mandate of maintaining price stability but the secondary mandate of supporting the economic policies of the UK government and the European Union, respectively; see the Bank of England Act 1998, Part II(11), available from the UK National Archives at https://www.legislation.gov.uk/ukpga/1998/11/contents, and the Treaty on the Functioning of the European Union, Article 127(1), available from the European Union at https://lexparency.org/eu/TFEU/ART_127. back to text