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Study questions the Federal Reserve’s independence

GrafaGrafa2024/08/25 01:35
By:Liezl Gambe

A new paper by Thomas Joseph Webster, Professor Emeritus of Economics at Pace University, casts doubt on the long-held belief in the Federal Reserve’s political independence, suggesting that the institution is more a political tool than an independent body.

Webster's comprehensive study, titled "The Myth of Fed Political Independence," argues that the Federal Reserve operates in close conjunction with the U.S. government, effectively acting as a financier for congressional spending.

The paper scrutinizes the Fed’s role in purchasing U.S. Treasury securities, especially during periods of significant fiscal deficits, which Webster claims undermines the central bank’s primary mandate to maintain price stability.

Webster’s research covers the period from the global financial crisis in 2010 to the end of 2021, revealing that the Fed prioritized accommodating the budgetary agenda of the White House and Congress over controlling inflation.

According to the study, an insider from the Federal Open Market Committee (FOMC) acknowledged the political challenges the Fed faced in ending its quantitative easing (QE) program, as both Congress and private-sector businesses had grown dependent on the availability of cheap money.

The paper provides empirical evidence that the Fed’s monetary policies are heavily influenced by political agendas, citing the rapid expansion of the Fed’s balance sheet as a key indicator of its complicity in supporting government spending.

Webster points out that between the fourth quarter of 2008 and the first quarter of 2021, the Fed’s balance sheet ballooned from $2.4 trillion to $8.8 trillion, while the Consumer Price Index (CPI) surged by 32%, from 211 to 280.

The study suggests that the Fed's actions, particularly in the wake of the financial crisis, were more about propping up government fiscal policies than ensuring the broader economic stability that the institution is mandated to protect.

Webster concludes that the notion of Federal Reserve independence is largely a myth, with the institution increasingly seen as politically co-opted, especially given its significant role in supporting expansive government budgets.

The paper further argues that the Fed’s policies have had a disproportionately negative impact on low- and middle-income households, raising concerns about the central bank’s effectiveness in safeguarding the economy for all Americans.

Webster's analysis calls into question the broader implications of the Fed's political entanglements, suggesting that the central bank's departure from its primary objectives could have long-term consequences for economic stability and equity in the U.S.

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