The Federal Reserve’s Conflict of Interest

I recently commented on the new financial regulation law which, in effect. has tilted the effect of the Fed in many ways, giving the executive branch of government much more power that it ever had.

Independent-minded economists, however, have always come to the Fed’s defense, in its attempt to keep the Federal Reserve as free from politics as possible.

Despite the logic for the Fed’s independence, Congress always has wanted to impose some influence. It has to an extent. Since 1978 the Fed has had to enforce the Full Employment and Balanced Growth Act, known as Humphrey-Hawkins. That conflicts with the Fed’s stated currency/inflation activity.

The Humphrey-Hawkins Full Employment Act enforcement creates an inflating bias. Certainly not one of dollar stability. So there is always a conflict of interest.

Congress would want the Government Accountability Office, their investigative arm, to audit Fed monetary policy. And the Obama administration constantly wants to add fresh responsibilities, which are bound to sap the Fed’s objectivity and main focus.