While it is nice to have direction from the Federal Reserve chairman on monetary policy and other important issues, the financial markets need policy stated in more succinct terms. This applies to all the Fed meetings under Alan Greenspan’s reign.
At the last Fed meeting, the chairman signaled to the world that even with stronger U.S. growth in the forecast, the federal funds interest rate would remain accommodative for “a considerable period.” I was taught that the Fed’s primary job was in creating price stability. Now they are telling the financial markets and the public: growth at any price. Hopefully they don’t mean it.
The general tax-paying public would be better served if each of our government branches, departments, and agencies would restate their primary missions and how they are to accomplish those missions, thereby creating accountability.
For instance, the Federal Reserve would state an inflation target range that can be deemed a good long-term policy goal, thereby fostering its price-stability mission.
If the Fed were to state an inflation target range, the financial markets and corporate CEOs would know short term and long term what to expect from the Fed in terms of monetary and interest-rate policy. The Federal Reserve would still retain ample flexibility to respond to trends gone awry and emergencies that occur from time to time. Meanwhile, making an inflation-goal policy known would engender trust over time with the business (mostly small entrepreneurs) and financial communities. Businesses and the markets would settle down to creating value for the investor instead of profits and losses for the speculators and the greedy.
The general public deserves standards, transparency, and accountability. The Fed should do everything in its power to retain the trust of the general public. They should fight for their own independence; for the independence of the SEC in their mission to protect the small investor; for the oversight of Fannie Mae and Freddie Mac; and for the independence of the Financial Accounting Standards Board (FASB).
The risk to our capitalist system does not come from the normal swings of economic cycles. It comes from short-term gamesmanship and a lack of true accountability, both of which can create a crisis of confidence.
Let’s not go there.
— Patricia A. Small is a partner with KCM Investment Advisors [visit their new site], and is the former Treasurer, University of California.