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The Fed’s price stability achievement: A case for Federal Reserve independence

By Kim Schoenholtz and Stephen Cecchetti

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Considering the Fed’s impressive price stability achievements over recent decades—in the face of extraordinary disturbances—a loss of Fed independence would be a tragedy not only for the US, but for the world.

“We believe the Federal Reserve’s large-scale asset purchase plan (so-called ‘quantitative easing’) should be reconsidered and discontinued... The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.” (Wall Street Journal 2010).

Over the past decade, critics of all stripes have assailed Federal Reserve monetary policy. At one end of the spectrum were those arguing that the Fed’s expansionary balance sheet policy risked currency debasement and high inflation. While the authors of the letter above sought merely to influence ongoing policy, others called for replacing the Fed altogether, and restoring the Gold Standard (Allison 2012 is a recent advocate of this). And then there were those promoting oversight of monetary policy operations that would significantly curtail central bank independence.

At the other end, yet another set of critics worried about outright deflation. According to monthly averages from Google Trends, since 2004, US searches for “deflation” were twice as frequent as those for “hyperinflation”. Squarely in the second camp, officials inside the Federal Reserve System developed deflation probability trackers like the one depicted in Figure 1. And some economists have called for a higher inflation target.

Read full article as published by VoxEU.

Kim Schoenholtz is Professor of Management Practice in the Department of Economics and Director of the Center for Global Economy and Business.