The US central bank’s shield from political interference is “under some threat” from Congress, a prospect that could erode progress in the economy, Federal Reserve chief Janet Yellen warned Monday.
Research shows that countries that allow the central bank independence in setting monetary policy “tend to enjoy stronger macroeconomic performance,” Yellen said in a discussion at the University of Michigan.
The US Congress “very wisely” passed a law that afforded that independence to the Fed in the 1970s, but it is threatened by proposed legislation that would either audit the Fed’s decisions or require it to follow a strict mathematical formula to set interest rates.
“I always worry about threats to our independence,” Yellen said.
While she did not mention US President Donald Trump, he was highly critical of the Fed during the election campaign last year.
“I do think independence of a central bank to make decisions about monetary policy, free of short-term political pressures, is very important and results in better decision making, focused on the long-term needs and health of the economy,” Yellen said.
This does not mean the Fed lacks accountability or transparency, she said, noting that she is required to testify before Congress twice a year, and holds regular news conferences in addition to publishing the minutes of the policy meetings.
Yellen said the economy currently is “pretty healthy,” as it continues to gradually improve in the wake of the 2008 global financial crisis. But it will be key for the central bank to not allow inflation to accelerate too quickly.
She repeated the central bank’s expectation that it will need to raise interest rates only gradually to keep inflation hovering around the two percent target.
“But we don’t want to wait too long” to get to a neutral point where the interest rate is no longer stimulating the economy.
She cautioned that “if the economy ends up overheating and inflation were to rise well above target, we don’t want to be in position to have to raise rates rapidly which could conceivably cause a recession.”
“We want to be ahead of the curve not behind the curve,” she said.
The Fed has raised interest rates twice in recent months, after the initial hike in December 2015 moved the key lending rate off zero for the first time since December 2008.
Not only is inflation near the Fed’s two percent target, the unemployment rate has fallen to 4.5 percent, which she said is lower than what central bankers generally consider to be “full employment.”
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