The imperious Fed, much like the English Crown two centuries ago, formulates and carries out its policy directives without democratic input, accountability, or redress. Not only has the Fed's monetary restraint at times deliberately pushed the economy into deep recession, with the attendant loss of millions of jobs, but also its impact on the structure of interest rates and dollar exchange rates powerfully alters the U.S. distribution of national income and wealth. Federal Reserve shifts in policy have generated economic consequences that at least equal in size and scope the impact of major tax legislation that Congress and the White House must belabor in public debate for months.

Popularized studies of Federal Reserve performance in recent decades convey the image of the Fed seated in its Greek temple on Constitution Avenue, with Chairmen Volcker and Greenspan elevated to the realm of the gods. From centers o

Greenspan, Alan. Testimony before the House Committee on Banking, Housing and Urban Affairs. Reprinted in Challenge, September-October 1993, 4-10.

These deliberate steps to raise the entire spectrum of money and long-term capital rates, despite the fact that inflation had remained at a fairly stable and moderate rate of 3 percent, had generated widespread criticism from Wall Street analysts and bond traders, leaders of U.S. manufacturing and labor, members of Congress from both parties, and academic economists (see the Challenge Symposium, January-February 1995). The Fed's actions in 1994 and the chairman's explanations of the FOMC's motivations are causing analysts to reexamine the Fed's policy strategies over the past fifteen years. In retrospect, the Federal Reserve's performance in the turbulent economic times since the early 1970s raises many questions in a number of major policy areas. The three major functions of the Federal Reserve should be thoroughly examined within the debate over central bank independence:

Yet, despite these theoretical "breakdowns," in his 1993 testimony, Greenspan suggested still another theoretical strategy. The Fed should assess the equilibrium term structure of real interest rates: "Maintaining the real rate around its equilibrium level should have a stabilizing effect on the economy, directing production toward its long-term potential" (p. 8). This vision may be quite true in theory, but practically useless to central bankers for three reasons: (1) How we measure real interest rates is not a simple exercise, especially for long maturities. (2) More difficult is the task of measuring an equilibrium structure of real interest rates. This is a challenging intellectual exercise for doctoral dissertations and learned journal articles. Its science diverges too far from the real world of policy-making "artists," who must practice the "art of central banking," as R.G. Hawtrey saw it. (3) Perhaps most important, this guide to long-term equilibrium rates cannot be of much help to the central bankers coping with week-by-week change from one short-run disequilibrium to the next. In the long run, institutional parameters will very likely be quite different.

In 1944, President Franklin Roosevelt set forth the basis for his postwar domestic program in an "Economic Bill of Rights." His number one priority was "the right to a useful and remunerative job." Congress soon passed the historic Employment Act of 1946 with strong Democratic and Republican support. It gave the federal government explicit responsibility to promote "maximum employment, production, and purchasing power." (This was subsequently amended and strengthened in the Full Employment and Balanced Growth Act of 1978.)

Since the oil price shocks of 1973-74, and again in 1979-80, inflation fears have steeled economists and policy makers to ever greater resolve to fight "a great battle . . . waged against the demon of inflation that had damaged and distorted the U.S. economy since the late 1960s" (Mussa, 1994, p. 81). Cool-headed analysis has not prevailed in trying to determine whether inflation is essentially monetary, nonmonetary, or structural in origin. Yet, even Milton Friedman made that point very clearly in a now-forgotten debate with Robert Roosa, published in an AEI book (see Milton Friedman, 1967). Changes in relative prices, or the real terms of trade, do feed into the CPI, but such impulses (from oil price and agricultural price jumps) are not a monetary phenomena and cannot be corrected by central bank restraint (see Barrel, 1984, pp. 20-22; see also Rostow, 1978). At least half the decline in the CPI inflation rate in the early 1980s was attributed directly to the fall in oil prices (McClain, 1985). Monetary restraint might have contributed to the oil price fall by depressing global demand but only by imposing the highest unemployment since the Great Depression - 9.7 percent in 1982 and 9.6 percent in 1983.

Blinder, Alan

Some common words found in the essay are:
Federal Reserve, Reserve Fed, Board Governors, Chairman Volcker, CEA Chairman, According Bums, Alan Greenspan, Federal Reserve's, Milton Friedman, Germany Italy, federal reserve, monetary policy, central bank, money credit, oil price, financial institutions, economic policy, economic report president, fiscal policy, washington dc, economic report, central bank independence, american enterprise institute, banks financial institutions, dc american enterprise,
Approximate Word count = 7246
Approximate Pages = 29 (250 words per page double spaced)