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What is the Federal Reserve up to? Hot on the heels of Ben Bernanke’s “I feel your pain” interview on 60 Minutes on CBS, when the chairman explained the history and function of the US central bank, comes an odd joint statement with the Treasury setting out their respective roles in fixing the current crisis.
No one is criticising the Fed. Yet.
I think Mr Bernanke is making a few pre-emptive measures to shore up its legitimacy and its independence. In the current climate, the public and political mob could turn against the Fed terrifyingly quickly if it is seen to be favouring Wall Street types over the average US citizen.
Point two of the four-pronged statement is important in this regard.
Actions taken by the Federal Reserve should aim to improve financial or credit conditions broadly, not to allocate credit to narrowly-defined sectors or classes of borrowers. Government decisions to influence the allocation of credit are the province of the fiscal authorities.
Mr Bernanke has also talked repeatedly about the need to pull back the trillions of dollars in loans it has pumped into the credit markets, an expansion of its balance sheet about which some Republican inflation-hawks have started to express concern. The risk is that the Fed’s vital work to reflate the credit markets might get caught up in discussion about Obama’s oversize budget in the coming months.
A non-political Fed has been the one institution able to move fast enough and on a sufficient scale to keep the financial system from collapsing over the past 18 months. The confidence of investors in the US economy, both domestic and international, is hinged in large measure on its independence.
Politicising the Fed would lead to disaster, perhaps very quickly.
And Ben Bernanke knows it.