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Fed's Future: Will the Bank Become a Political Pawn?

Controversy over the Federal Reserve's role during the financial crisis continues to ignite debate over whether the central bank is too powerful, but reigning in the bank's authority may make it a pawn of political whims.

The Crisis: 1 Year Later - A CNBC Special Report - See Complete Coverage
The Crisis: 1 Year Later - A CNBC Special Report - See Complete Coverage

Currently, there is a proposal from the Obama Administration that would require the Fed to have the Treasury Secretary’s permission before it could take emergency action.

CNBC heard from a variety of experts who all agreed: Leashing the Fed could have grave repercussions.

Political influence on the Fed could be detrimental to creating effective monetary policy, Charles Plosser, president of the Philadelphia Federal Reserve Bank, told CNBC.

"History has shown and the data show that banks that don’t have that political independence to take monetary policy actions, even when it seems politically undesirable, end up with higher inflation rates and less economic performance," said Plosser.

"So its very clear that monetary policy needs to be independent of the short-run political pressures that many people try to place on us.”

Alfred Broaddus, former Richmond Federal Reserve President, told CNBC he also thinks the Fed should not lose power, but perhaps gain even more clout.

“The thing that most needs to be done, is first of all give the Fed the authority to be what is being referred to as the 'macro Prudential Financial stability overseer,'” said Broaddus.

The Fed needs the power to oversee not only the banking institutions, but also companies like AIG, which pose potential systemic risk, Broaddus said.

It is the agency's role is to regulate the financial system, which now includes more than just banks, Mark Vitner, a senior economist for Wachovia, told CNBC. (Click Here to Watch Vitner Interview)

“I don’t think it's time to reel in their clout or their power, in fact I think it needs to be clarified a little bit," said Vitner.

This Day 1 Year Ago - A CNBC Special Report - See Complete Coverage
This Day 1 Year Ago - A CNBC Special Report - See Complete Coverage

"When the Fed was invented a hundred years ago or so, it was really designed to deal with problems with the banking system, because the banking system was the financial system, but the financial system has gone way beyond that.”