South-Westerns' Economic News Summaries
New Fed Chief Brief but Clear
Topic Monetary Policy
Key Words Federal Reserve Chairman, Monetary Policy, Political Independence

News Story

The Federal Reserve's independence has long been a source of controversy among economic analysts. Opponents say it is undemocratic to have a powerful policy-making body that is not elected and is thus not subject to the people's will. Proponents of an independent Federal Reserve contend that such independence from political pressure makes it possible for the Fed to conduct monetary policy and target stable prices without undue influence from political factions.

Complete independence would mean that the Fed Chief simply would not comment on politically hot topics like tax reform and fiscal policy. During the Congressional questioning, Bernanke refused to echo previous chairman Greenspan's contention that Congress should reinstate budget rules requiring that it pay for new tax cuts and new spending with savings in other areas of the budget.

"I don't feel it's appropriate for me to make recommendations to Congress about their procedures," Mr. Bernanke said. Bernanke also played down worries about the United States' record trade deficit, its growing foreign indebtedness and the possibility of a drop in the housing market. He cited Fed statistics on core inflation (which excludes volatile food and energy prices) to be about 2 percent in 2006. This is just below the Fed's unofficial comfort zone. Bernanke remarked that he was "…comfortable with the projection" but warned investors not to assume that the Fed was finished raising the benchmark interest rate. The Fed will have to make "…ongoing provisional judgments" abut the risks to inflation and growth, he said, and decisions will be "increasingly dependent on incoming data."

Mr. Bernanke tried valiantly to sidestep both Democrats and Republicans on whether President Bush's tax cuts should be made permanent, he did not entirely succeed. "If the tax relief expires, which would amount to basically a tax increase at that point, what, if any, impact do you think that would have on jobs and growth?" asked Representative Paul Gillmor, Republican from Ohio. Chairman Bernanke responded that "…most economists would agree that the tax relief earlier this decade was helpful in helping the economy recover from the recession in 2001."

Mr. Bernanke's most notable trait in the hearing was the comparative brevity of his answers. He fielded various questions on an array of topics, and although he was quite specific in his answers, the answers were often shorter than the questions--and almost always shorter than the answers that Mr. Greenspan used to give in similar settings. As compared to Greenspan, the new Fed chief appears to more matter-of-fact and specific in terms of his responses to questions on the economy, and it appears that he will try to maintain a strict code of political independence.


Discuss the notion of Federal Reserve independence. Can you express a possible specific economic outcome if the Federal Reserve was not independent?

Source Edmond Andrews, "Trying a New tack, Fed Chief Is Brief, Clear and Also Upbeat", The New York Times Online,February 15, 2006.
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