Philly Fed's Plosser stresses independence for central bank

The presidents of the 12 regional Federal Reserve Banks give lots of speeches throughout a year.

They are often dry and usually try to explain a president’s view on inflation, interest rates and the economy.

So there was Federal Reserve Bank of Philadelphia president and CEO Charles I. Plosser at Lafayette College in Easton Tuesday night giving a talk on “Demystifying the Federal Reserve.”

The Fed mystifies a lot of us, so I was curious to see what Plosser would reveal as he peeled back the curtain to show us the inner workings of the central bank.

Unfortunately, the best nugget of information I could glean from his speech was that the Federal Reserve System turned over nearly $35 billion to the U.S. Treasury in 2008. That money represented excess earnings on its portfolio of securities and loans.

Plosser mentioned that statistic while making a point about how crucial it is that the Fed retain its independence from political interests. From its start, the United States has been wary of power being centralized. Instead of kings for life, we have elected presidents.

That suspicion extended to efforts at establishing a central bank to guide monetary policy. That’s why we have 12 reserve banks, which have a voice in the Fed’s decisions, and Fed governors who are political appointees.

But with the Great Recession spurring an overhaul of financial regulation, some fear that the Fed may lose some of that independence.

Count Plosser in that camp. Plosser said Fed policymakers must anticipate what the economy will look like in one to three years. Politicians are much more short-term-oriented.

The current independence enjoyed by the Fed prevents the government “from using the central bank to fund off-budget spending plans or to more directly fund budget deficits,” he said.

Given that the U.S. budget deficit for 2009 is estimated at $1.6 trillion, that is an urge that must be resisted.

Inflation is Plosser’s constant worry. But it’s grounded in experience. The Fed needs to be vigilant on “price stability” even as it tries to be accommodative to economic growth.

Political influence would mess with what is already a tough balancing act.