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RECENT POSTS» MoreCurrent DateTime: 02:33:29 13 Nov 2009LinksList Documentid: 33310671The Congressional Assault on Fed IndependenceAddicted to Easy Money?A Red-Ink Train Wreck: The Real Fiscal Cost of Government-Run HealthcareA Short-Sighted Cheer for Easy MoneyStocks and Voters Show GOP the WayIs the Obama Bubble About to Burst?The Economics of a Three-Race GOP SweepGDP Up, Dollar Down, Troubles RemainSupply-Side Healthcare Solutions with Sen. Mitch McConnellEconomic Freedom Fighters, UniteSHOW TIMESCNBC US:Weeknights 7p ETCNBC Asia:Saturday 06:00 SIN/HKSunday 04:00 SIN/HKCNBC Europe:Monday - Friday 10:00 CETSaturday 06:00 CETSunday 04:00 CETRSS FEED» HelpCurrent DateTime: 02:33:29 13 Nov 2009LinksList Documentid: 28775123Subscribe to this RSS feed
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setDefault('cnbc_textbody');The Congressional Assault on Fed IndependencePublished:
Thursday, 12 Nov 2009 | 10:42 AM ET Text Size By: Larry KudlowCNBC Anchor
Investors and political analysts should keep a sharp eye on the congressional assault on Federal Reserve independence.
This is a transparent effort by members of Congress to use the financial-reregulation bills as a means of applying political leverage to stop the Fed from any 2010 midterm-election-year exit strategies that might raise the federal funds target rate, stop the purchases of mortgage-backed bonds, and drain cash from the economy.
The Chris Dodd bill unveiled this week spells it all out. The White House would appoint the chairmen of the regional Federal Reserve banks (New York, Dallas, Richmond, etc.), subject to confirmation by the Senate. In addition, the Federal Reserve Board in Washington would appoint all the directors of these regional Fed banks. Right now, the local member banks appoint two-thirds of the directors, with the remaining one-third appointed by the Fed board in Washington.
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These would be the biggest changes to the unique public-private composition of the Federal Reserve System since 1913, when the Fed was created under Woodrow Wilson.
Remember, the local Fed boards now appoint the reserve-bank presidents, who then vote on policy at Federal Open Market Committee (FOMC) meetings. So this is a transparent effort to influence Fed policy through the FOMC voting members by changing the people who vote on these members. Think of Barney Frank. The House Financial Committee chairman has often remarked that the hawks on the FOMC always seem to be the reserve-bank presidents. He wants doves.
Now, I'm not going to defend the Fed's actual policy. As I have written many times, the Fed should be targeting financial and commodity-price indicators, which today are all signaling that the Fed is too loose and that it is creating far too many new dollars. Gold keeps hitting new record highs in nominal terms. The greenback has become the U.S. peso. Instead, the Fed has been targeting the unemployment rate and GDP. In terms of preventing any new bubbles, this really is the biggest problem.
However, I will defend Fed independence. If the Congress, backed by the White House, runs monetary policy, the inflationary tilt will be even greater.
On CNBC.com now:
Slideshow: How Your Tax Dollars Are Spent
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