Fed boss: Fed must be free from political meddling

Bernanke: Fed must protect ability to make economic decisions free from political meddling

Jeannine Aversa and Tomoko Hosaka, Associated Press Writers, On Tuesday May 25, 2010, 8:39 pm

TOKYO (AP) -- The Federal Reserve and other central banks must protect their ability to make key economic decisions free from political interference, Fed Chairman Ben Bernanke said Tuesday.

As governments move ahead on reforms to prevent another global financial crisis like the one in 2008, Bernanke stressed the importance of the Fed and other countries' central banks maintaining their independence over setting interest rates, known as monetary policy.

The Fed, for instance, often must make decisions such as boosting rates to keep inflation in check that are unpopular with politicians but are necessary for a healthy economy.

Politicians generally prefer holding interest rates low, which stimulate the economy and hiring.

"Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind inflationary pressures that worsen the economy's long-term prospects," Bernanke said in a speech prepared for delivery to an international conference on the matter.

"Thus political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation," Bernanke added.

Bernanke's comments come as Congress edges closer to completing action on revamping U.S. financial rules, and subjecting the Fed to more oversight.

A provision contained in a House-passed bill doesn't specifically carve out monetary policy from congressional audits as current law does. However, the House bill says the audits shouldn't interfere or dictate the setting of interest rates. A Senate-passed bill, on the other hand, provides for a one-time audit of the Fed's emergency lending program. Congress must reconcile the two bills before a final vote is taken.

Bernanke said the Fed's emergency loan program to banks also should be free of political interference. For years, the Fed -- as a lender of last resort -- has made low-cost loans to banks when they couldn't get financing elsewhere. The identities of banks drawing the loans aren't made public for fear of causing a run on the institution and defeating the purpose of the backstop.

He also said he thinks the Fed's decisions on purchasing long-term securities, a move to drive down interest rates, also should be protected from political meddling.

Congress' audit provisions emerged in response to populist anger over the Fed's role in bailing out Wall Street companies during the 2008 crisis. The rescues provoked public outrage at a time when many Americans are struggling with nearly double-digit unemployment, stagnant wages and rising home foreclosures.

In his speech, Bernanke didn't talk about the future course of interest rates in the United States, or the European debt crisis, which has rattled Wall Street and stock markets around the globe.

At its last meeting in late April, the Fed maintained a pledge to hold rates near record lows for an "extended period" to support the economic recovery in the United States.

Even as the Fed must retain its independence, Bernanke said it and other central banks must be accountable to lawmakers. The Fed has taken steps to be more open about its dealings and about its thoughts on setting interest rates.

Greater clarity on the direction of interest rates, helps shape behavior of investors, consumers and businesses, Bernanke said. And, that can help the Fed be more effective. Bernanke said the Fed is open to exploring new ways to be more open in the future.

Aversa reported from Washington.