(Bloomberg) -- The Federal Reserve’s unique structure helps preserve monetary policy independence, according to a new academic study that comes at a time of heightened tensions between the White House and the central bank.
Nobel laureate Edward Prescott and Rutgers University economics professor Michael Bordo argue the Fed’s deliberately decentralized design -- with 12 regional banks around the country augmenting the Board of Governors in Washington -- has been a source of strength.
They find the district banks have a record of contributing ideas to the economic debate, ensuring regional views are heard in Washington, and helping insulate monetary policy from politics because Fed presidents are not political appointees. Governors, including the chairman, are nominated by the U.S. president and subject to Senate confirmation.
“Reserve banks, with the competition in ideas they can provide, are essential in preserving the flow of information and the generation of ideas within the system,” the authors write in a new working paper distributed by the National Bureau of Economic Research. District banks “ultimately help the Federal Reserve solve the changing problems it faces.”
President Donald Trump, who isn’t mentioned in the 67-page paper, has relentlessly attacked the Fed and its chairman Jerome Powell for raising interest rates. He unleashed a fresh barrage Monday, ahead of a Fed meeting this week at which officials are expected to cut rates for the first time in a decade.
Trump’s criticism overturns decades of tradition in which the White House avoided public comment on Fed policy out of respect for its independence, granted to the central bank by Congress which has tasked it to pursue maximum employment with stable prices.
That said, Trump isn’t the first U.S. president who sought to sway the Fed. The paper’s authors give particular credit to William McChesney Martin, chairman from 1951 until 1970, for reforms on his watch that helped extricate the Fed from its war-time role of being a bureau of the U.S. Treasury while enhancing the independence of monetary policy.
Prescott is a senior economic and policy adviser at the Cleveland Fed. Bordo has worked with the regional reserve banks and is on the Shadow Open Market Committee of economists who monitor the Fed.
