Fed’s Kohn warns less independence & autonomy may cause higher interest rates

July 9, 2009 by · Leave a Comment
Filed under: Opinion 

As you know in this previous post, I was in agreement on the technical basis, that an perceived erosion in the Federal Reserve’s independence would be back in the short-term.  The reasoning was on the basis that foreign investors would become scared that the money printing would accelerate and that would devalue all dollars so to compensate for this, the investors would demand higher yields on new treasury issues.

BUT, I do take issue with the statement farther down in the article that quotes Donald Kohn as saying this about the bill in audit the Federal Reserve via the GAO (General Accounting Office), “Such legislation is “contrary to the public interest” because investors may see it as “undermining monetary independence,” Kohn said. “Such an action would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation.”

What this tells me is that the books for Fed are so messed up, that a full audit would send the market into a panic.  If that is the case then the audit is what is really needed to restore confidence.  I don’t buy the argument that somethings are better to not be known for our own good.  That is an area that is ripe for abuse because of the opaqueness.

News (Bloomberg):

Federal Reserve Board Vice Chairman Donald Kohn said any “substantial erosion” of the central bank’s independence in setting interest rates may fuel investor fears of inflation and provoke higher long-term borrowing costs.

“The insulation from short-term political pressures — within a framework of legislated objectives and accountability and transparency — that the Congress has established for the Federal Reserve has come to be widely emulated around the world,” Kohn said in testimony at a House Financial Services subcommittee hearing today on Fed independence.

The Fed’s ability to act without political interference is at stake as Congress debates how to overhaul financial regulation following the worst credit crisis since the Great Depression. Some lawmakers advocate congressional audits of the central bank, while others are considering subjecting regional Fed presidents, who vote on interest rates, to Senate approval.

“History provides numerous examples of non-independent central banks being forced to finance large government budget deficits,” Kohn said. Higher rates may also “further increase the burden of the national debt on current and future generations,” Kohn said.

Click Here to Continue Reading

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!