Reforming or Deforming the Fed?

BERKELEY – The silly season that is a presidential election campaign in the United States has taken a particularly absurd turn as the candidates offer their proposals for monetary-policy reform. This is not the first time, of course, that presidential candidates have proposed changing how US monetary policy is conducted. But the radical, sometimes harebrained, nature of the current crop of schemes is exceptional by historical standards.

Why such proposals appeal to the candidates and potential voters is no mystery. Since the financial crisis, the US Federal Reserve has taken a series of unprecedented steps, cutting interest rates to zero, massively expanding its balance sheet, and bailing out troubled financial institutions. Those measures were intended to treat the economy’s ills, but their very association with those ills encourages the belief that they are somehow the underlying cause.

Likewise, the Fed’s participation in rescues of troubled financial institutions is criticized for favoring Wall Street over Main Street. And, separately, the Fed is slammed for creating inequality, first by keeping interest rates low, which hurts those on fixed incomes, and now by raising rates, which keeps a lid on wage growth.

Clearly, the Fed just can’t win – and for reasons that have nothing to do with current monetary policy. Two of the most deep-seated features of American political culture – with roots extending back to the eighteenth century – are suspicion of powerful government and distrust of concentrated financial power. The Fed is the single institution that best encapsulates those fears.