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  • Next Fed Chairman: Independence Is Paramount

    Federal Reserve Building

    Newscom

    Larry Summers withdrew his name from consideration for the next chairmanship of the Federal Reserve. The office currently occupied by Ben Bernanke wields enormous power over short-run economic changes. Poor decisions at the Fed can cause recessions or boost markets briefly. For that reason, the most important feature of the Fed is its independence from short-term goals of elected politicians.

    While Summers’s nomination met opposition for various reasons—his monetary policy views, his regulatory experience, and even his temperament—the real reason to be grateful for his withdrawal is that he was so closely linked to policymaking in the executive branch.

    Summers’s considerable talents have been employed as Secretary of the Treasury in the Clinton Administration and as director of the National Economic Council under President Obama. Were he to become chairman of the Fed, markets would always assume that he maintained his close links to the Administration—even if that were not the case.

    Thus, the chairmanship would be compromised by close personal links to the White House: Merely the supposition of personal sympathy or coordination between the executive branch and the Fed would erode the credibility that undergirds Federal Reserve policymaking.

    As President Obama considers his choice of nominee, he should look for an economist with deep understanding of monetary policy and commitment to rules-based Fed policymaking but without a history of political engagement.

    Posted in Economics, Front Page [slideshow_deploy]

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