Zandi: In Defense of Fed Independence

The GOP rhetoric against the Fed shows no signs of slowing down this holiday season. Can you imagine what the dinner conversation would be at Thanksgiving Dinner with Representative Ron Paul, Federal Reserve Chairman Bernanke, Senator Bob Corker and Representative Mike Pence? Oh to be a fly on that table!


The Fed has been politicized like never before. Now some Capitol Hill lawmakers are arguing that its dual mandate—price stability and full employment—should be stripped. I decided to speak with Mark Zandi, chief economist of Moody's Analytics about all of this and what's his message to Congress.

MZ: I think the worst thing that could happen is if the Fed was politicized. An a-political Federal Reserve is a cornerstone of our financial system and broader economy. So nothing is more important than maintaining the Fed's independence. And the fact that its wrapped in the political process is just disturbing and disconcerting.

LL: Was QE2 necessary?

MZ: From the Fed's perspective part they view this as a part of monetary policy. So when you an economy that is struggling, an unemployment rate that is near double digits, and inflation that is low and decelerating it calls for more monetary stimulus and this is the next step.

I think they were probably surprised by the response and the fact it got wrapped up in the political debate . In hind site, they might have done things a bit differently. Maybe they would have waited until the next the next FOMC meeting which would have been on the other side of the election, and with the emphasis that the right thing for the economy is more QE.

LL: Do you think the Fed should continue to have the dual mandate?

MZ: I think reducing the dual mandate to a single mandate, would not result in a significant change in the way they conduct policy. I do think though, it may send an unfortunate signal to the broader population that the Fed's only purpose going forward would be on inflation and not on their plight in finding a job. So timing, I think particularly, would be unfortunate because people might believe the Fed is not focused on what they care about the most and that's finding a job.

So, given that the change in mandate doesn't mean a whole lot, symbolically, it means something and I don't think it makes sense to make the the change. Certainly not at this juncture when things are in such flux and the economy is still struggling to get going. This is perhaps a debate for another day when the economy is functioning more normally.

LL: What are your thoughts on Ron Paul who will be overseeing the Fed when he chairs the House Subcommittee for Domestic Monetary Policy and Technology and wants to revolutionize the monetary policy. Ending the Fed or at least auditing it. Is an audit in order?

MZ: I think an audit of the Fed should be very well defined and narrowly focused and should be designed not to effectively, or seemingly affect the monetary policy process because that would be very counter productive.

Audits are not a bad thing per say, but they have to be well defined and focused. Its the independence of the Fed that is the bedrock of the financial system and the economy.

LL: Do you think the Fed is being unfairly targeted by the GOP?

MZ: What Bernanke is doing is what Bernanke thinks is what is needed and is appropriate. What they are doing is a function of the tough economy and prospects for out right deflation. So I think what they are doing has nothing to do with politics.

This is what they think is best, so therefore, it would be prudent for Congressmen, policymakers, Administration and whomever else, allow the Fed to do their job and not interfere with them because that has always worked well for us. We have a lot of problems to addressed.

LL: Would you have an criticisms on how the Fed has handled this?

MZ: The only criticism I would have on the Fed is probably the marketing of all of this. I think they needed to be clearer up front with how they expected QE2 to benefit the economy, what the downsides were and if people had that framework then maybe, some of this might not have happened. But in terms of what they have done, I think its entirely appropriate. And its entirely inappropriate for other policy makers to interfere in the process in anyway particularly at this point.


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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."