Imagine that the Federal Reserve’s policymakers were as divided on monetary policy as members of Congress are on almost everything. Imagine that this lack of consensus also typically blocked action. The Fed’s post-crash moves on interest rates and its adventurous use of unorthodox measures such as quantitative easing simply couldn’t have happened.
Not everybody agrees with me that this would have been a terrible thing. (To get a flavor of the alternative, skeptics could take a look at the euro zone.) For the sake of argument, though, suppose that freedom of action in monetary policy is indeed desirable. The point is, this freedom isn’t to be taken for granted. It’s about to come under new pressure.
The Fed is more of an anomaly in the U.S. system of government than is generally acknowledged. It has tacit permission to float above politics — in this country, an almost unique privilege. It isn’t as though its decisions stand outside the normal terrain of political debate. How quickly to bring down unemployment, and how much risk of other harms (inflation, financial instability) to tolerate, are contentious matters, or so you’d think. Yet for the most part, the Fed makes these calls as it chooses.
The history of this dispensation is complicated. One of the ideas supporting it was that monetary policy isn’t as political as it seems. Economists believed that the trade-off I just mentioned — between unemployment and inflation — wasn’t that important. In the long term, the Fed doesn’t have to choose between goals for inflation and employment, because monetary policy doesn’t have much effect on the supply side of the economy. In this view, the Fed doesn’t face much of a dilemma. Balancing its main tasks isn’t so politically charged after all.