by Allan H. Meltzer
September 16, 2013
The Federal Reserve long ago gave up some of its independence. Can it be restored? Independence is central to the Federal Reserve’s ability to choose policy actions that achieve price stability. Sacrificing much of its independence, as the Fed often has, permits others to pressure the Fed to achieve other objectives, usually short-term objectives. That is one reason that the Fed responds to short-term events often at the cost of failing to achieve longer-term objectives. The Fed should commit to a rule or quasi-rule like the Taylor rule, that aims at both reduced unemployment (or relatively stable output growth) and expected inflation. The rule incorporates the dual mandate that Congress approved and that the public seems willing to support. When the Fed followed it closely, it worked well.