News and Views for Eighth District Bankers
Vol. 20 | No. 2www.stlouisfed.org/publications/cb
is published quarterly by thePublic Aairs department of the FederalReserve Bank of St. Louis. Views expressedare not necessarily ocial opinions of theFederal Reserve System or the FederalReserve Bank of St. Louis.Sign up for
e-mail notices atwww.stlouisfed.org/publications/cb/. Followthe Fed on Facebook, Twitter and more atstlouisfed.org/followthefed.To subscribe for free to
orany St. Louis Fed publication, go online towww.stlouisfed.org/publications/subscribe.cfm.To subscribe by mail, send your name, address,city, state and ZIP code to: Central Banker,P.O. Box 442, St. Louis, MO 63166-0442.The Eighth Federal Reserve District includesall of Arkansas, eastern Missouri, southernIllinois and Indiana, western Kentucky andTennessee, and northern Mississippi. TheEighth District oces are in Little Rock,Louisville, Memphis and St. Louis.
Independence Is Best Routefor Fed Accountability
By Julie Stackhouse
ankers are well aware o theunprecedented actions taken by theFederal Reserve in the all o 2008 tostem the downward spiral o the fnan-cial crisis. At various points in time,the Fed had more than $1.5 trillion out-standing in loans to fnancial institu-tions and, more recently, has purchased$1.25 trillion o mortgage-backed secu-rities to stabilize the economy.The magnitude o the Fed’s responseto the fnancial crisis has caused someto question why the Fed has the ree-dom to engage in such actions with-out the explicit consent o Congress.This reedom to stabilize the fnancialsystem without political direction iscommonly reerred to as “central bankindependence.”Legislation recently passed by the House o Representa-tives could aect central bank independence by permit-ting requent and ongoing reviews o monetary policy andfnancial stability decisions, deliberations and actions by theGovernment Accountability Ofce (GAO). Currently, mon-etary policy actions are not subject to GAO review.The implications o such reviews are signifcant andconcerning. GAO reviews o discount window loans, orexample, could serve to dampen the willingness o banksto borrow rom the discount window during periods o fnancial instability. Take, or example, the frst two daysollowing the tragic events o Sept. 11, 2001. I banks hadbeen reluctant to use the discount window or ear o GAOdisclosure, would our fnancial system have rebounded soquickly?The implications or monetary policy eectiveness mustbe careully weighed. The Federal Reserve’s ability to act inthe long-run best interests o the economy depends impor-tantly on its credibility and independence rom short-termpolitical pressures, including the temptation o governmentsto use the central bank to und budget defcits or alter the way monetary policy is conducted. Numerous studies haveshown that countries whose central banks are protectedrom short-term political inuence have better economicperormance, including lower ination and interest rates.Without question, the Federal Reserve should be account-able to the electorate or its actions. However, audits by theGAO are not the best way. Indeed, retaining the indepen-dence o the central bank may well be the best method orpreventing government rom misusing monetary policy orshort-term political purposes.
Julie Stackhouse issenior vice president of the St. Louis Fed’sdivision of BankingSupervision, Credit and the Center forOnline Learning.