Steve Chiotakis: The Federal Reserve today wraps up its two day session on monetary policy, with a couple of ideas on the table. It could, among other things, lower long-term interest rates in a move it’s calling “Operation Twist“.
Something else on the Board of Governors’ minds — a letter sent to Chairman Ben Bernanke from Republican leaders in the House and Senate asking them to refrain from any more monetary stimulus, because it may be doing more harm than good to the economy.
Morris Davis worked at the Federal Reserve under Chairman Alan Greenspan. He’s now a professor of real estate at the University of Wisconsin. Professor, good morning.
Morris Davis: Hey, good morning, how are you?
Chiotakis: I’m doing well. Are the concerns of Republican Congressmen correct?
Davis: Yeah. They are correct. it’s unusual — I don’t remember ever reading about members of Congress sending the Fed a letter asking them not to do anything. What the Republicans might be afraid of is that the Fed can’t reduce the unemployment rate, and that all we’re doing right now through monetary policy is setting the stage for future infaltion.
Chiotakis: I know Democrats have cried foul about this, including Senator Schumer from N.Y. How is this any different from when Chairman Bernanke is called to regular hearings on Capitol Hill, and he gets grilled by Congress there?
Davis: Well, Congress has always asked the Fed chairman for explantaion about his policies. So I think the only difference is that typically, the chairman’s asked to explain what he has done in the past. And now, our Congress is asking the chairman to not do anything in the future.
Chiotakis: Are you worried, professor, that this is going to threaten the Fed’s independence — or at the very least, set a dangerous precedent?
Davis: Yeah, absolutely. What you want is a central bank that is concerned about the health of the economy independent of where we are in election cycles. You know, there’s kind of been a gentleman’s agreement that the Fed would not interfere with elections. I guess maybe the members of Congress would see a huge stimulus announcement as potentially interfering with the election cycle. But, what you want is a central banker that doesn’t care about elections. What you want is a central banker that just does the best possible monetary policy — independent of who’s in Congress.
Chiotakis: Morris Davis, professor of real estate at the University of Wisconsin, used to work at the Fed in DC under Alan Greenspan. Professor Davis, thanks.
Davis: Thank you very much.
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