With Janet Yellen the clear front-runner for Federal Reserve chair, rampant speculation regarding her approach to monetary policy fills blogs and editorials. That is silly, of course. The Fed is a voting body with clear minutes of the many meetings she has attended as a voting member. Moreover, Dr. Yellen, like any real scholar, leaves a long and transparent trail of research on an especially broad range of topics. There is little reason to speculate about her approach.
Despite Dr. Yellen’s credentials and experience, there will continue to be criticisms of the Federal Reserve, both from the extreme left and extreme right. It is worth exploring these concerns.
From the left, the Fed is often disparaged for being too close to the banking industry. Many on the left detest bankers as venomous villains of capitalism and enemies of the poor. The barest accumulation of facts should defeat this viewpoint, but it is a visceral, not intellectual, position. The Federal Reserve is the biggest regulator of banks and maintains a broad think tank of some 600 economists who study banking and monetary policy. It could hardly be far removed from the banking sector and discharge its duties.
On the right, the Fed is viewed as a tacit enabler of the growth of government, and for that reason is to be distrusted. We Hoosiers should be especially wary of such silliness. The Fed was born of the inability of state and federal governments to finance the Civil War and Spanish American War. Nowhere was the folly of a weak banking system more apparent than in Indiana, where our governor had privately financed the Indiana regiments who marched to save the Union in the summer of 1861.
The Federal Reserve is a necessary institution. It is also an imperfect one, and it is there where helpful criticism is warranted. The most salient concern about Fed actions is surely linked to its dual mandate of promoting full employment and maintaining low inflation. The fact is that these two goals are necessarily in tension.