The Independence of the Fed Is Being Undermined

Hoover Institution: “A number of proposals have been put forward to reform the Fed. But I see disturbing trends in how Congress and others seem to envision the appropriate role for our central bank. In particular, Congress has been using the Fed to explicitly avoid tough fiscal choices. This undermines the independence of the Fed with potentially dangerous repercussions.”

“The most recent encroachment on Federal Reserve independence is perhaps the most serious. Last fall, Congress chose to fund a portion of a highway-transportation bill using the capital surplus account at the Fed and reducing the dividend payments to those large banks that have chosen to be member banks. This is poor policy from a number of perspectives. First, transportation infrastructure spending has typically, and correctly, been funded by taxes on users. This practice has now been abandoned. Worse, this action is further evidence that Congress increasingly seems to think of the Fed as a source of funding for fiscal initiatives. Central bank independence is incrementally being eroded.”

“Particularly troubling is the fact that the Fed has not put up much of a fight. Independence is a fundamental principle of sound central banking. The Fed should protest more vigorously and make clear to the American public the risks of such actions.”

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