Governor debunks narrative claiming Fed actions aimed at colluding with Treasury

The Federal Reserve will continue its independence from the Treasury Department and other federal entities in order meet its dual mandates of promoting maximum employment and stable prices, the agency’s newest board member said in a speech Monday.

“These congressionally mandated goals always drive our decisions; partisan policy preferences or the debt-financing needs of the Treasury will play no role in that decision,” Federal Reserve Gov. Christopher Waller told the Peterson Institute for International Economics of Washington, D.C. (via webcast).

Waller said he was using the opportunity of the speech to reinforce the concept of the Fed’s independence, which he said has recently come under scrutiny for its actions in maintaining low interest rates. He said a dual-tracked narrative has emerged lately that the central bank has caved in to pressures to keep interest rates low to help service the federal debt and to maintain asset purchases to help finance the federal government.

He called that narrative “simply wrong.”

“The Federal Open Market Committee (FOMC) determines the appropriate monetary policy actions solely to move the economy towards those goals,” Waller said. “Deficit financing and debt servicing issues play no role in our policy decisions and never will. Chair (Jerome H. “Jay”) Powell made this same point in his recent comments to the Economic Club of New York. My objective today is to reinforce that message.”

Waller said the Fed has cooperated with the Treasury to combat the financial impact of the coronavirus crisis – repeating a strategy that the Fed has employed in years past, but still maintaining its independence. He said cooperation between the fiscal and monetary authorities strengthens financial stability and that a financial crisis is not a time for uncooperative behavior from either side. However, he said, with economic stabilization, it is imperative that the central bank remain independent from the fiscal authority, adding that “there are sizable costs if cooperation turns into fiscal control.”

“Cooperation in times of crisis, like during the initial phases of the COVID crisis, was crucial for staving off an economic disaster, putting us on the road to recovery, and helping avoid long-run scarring and was the appropriate way to serve the Fed’s dual mandate,” Waller said. “But the independence of the Federal Reserve is in the nation’s best interest and should be valued and protected by all.”

Gov. Christopher J. Waller: Treasury–Federal Reserve Cooperation and the Importance of Central Bank Independence