Fed's independence 'under some threat', Yellen warns

Dr Janet Yellen says the central bank's autonomy in crafting monetary policy results in better decisions for the economy.
Dr Janet Yellen says the central bank's autonomy in crafting monetary policy results in better decisions for the economy.

It faces proposed legislation to audit its decisions or require it to follow strict formula in setting interest rates

WASHINGTON • The United States central bank's shield from political interference is "under some threat" from Congress, a prospect that could erode progress in the economy, Federal Reserve chief Janet Yellen has warned.

Research shows that countries that allow the central bank independence in setting monetary policy "tend to enjoy stronger macroeconomic performance", Dr Yellen said in a discussion at the University of Michigan on Monday.

The US Congress "very wisely" passed a law that afforded that independence to the Fed in the 1970s, but it is threatened by proposed legislation that would either audit the Fed's decisions or require it to follow a strict mathematical formula to set interest rates.

"I always worry about threats to our independence," Dr Yellen said.

While she did not mention US President Donald Trump, he was highly critical of the Fed during the election campaign last year.

"I do think independence of a central bank to make decisions about monetary policy, free of short-term political pressures, is very important and results in better decision making focused on the long-term needs and health of the economy," Dr Yellen said.

This does not mean the Fed lacks accountability or transparency, she said, noting that she is required to testify before Congress twice a year, and holds regular news conferences, in addition to publishing the minutes of the policy meetings.

Dr Yellen said the economy currently is "pretty healthy", as it continues to gradually improve in the wake of the 2008 global financial crisis. But it will be key for the central bank to not allow inflation to accelerate too quickly. She repeated the central bank's expectation that it will need to raise interest rates only gradually to keep inflation hovering around the 2 per cent target.

"But we don't want to wait too long" to get to a neutral point where the interest rate is no longer stimulating the economy, she said.

She cautioned that "if the economy ends up overheating and inflation were to rise well above target, we don't want to be in a position to have to raise rates rapidly which could conceivably cause a recession".

She added: "We want to be ahead of the curve, not behind the curve."

The Fed has raised interest rates twice in recent months, after the initial hike in December 2015 moved the key lending rate off zero for the first time since December 2008.

Not only is inflation near the Fed's 2 per cent target, the unemployment rate has fallen to 4.5 per cent, which she said is lower than what central bankers generally consider to be "full employment".

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on April 12, 2017, with the headline 'Fed's independence 'under some threat', Yellen warns'. Print Edition | Subscribe