Ben Bernanke as Joe Friday

October 2, 2012 09:30 AM
Just the facts ma’am

We live in an age of instant communication that targets sound bites instead of sound analysis. We also are in a highly partisan age of politics and media where, unfortunately, people go to where their particular prejudices are reinforced rather than to where they may find out what is actually happening.  

One area that historically has been free of politics is the Federal Reserve. It is designed this way so Federal Reserve Board Governors, who are appointed to 14-year terms by the president and must be confirmed by Congress, don’t have to serve political patrons. This way, hopefully, they can avoid our current contagion of short-term thinking.

This has been challenged of late as a year ago Congressional leaders took the extraordinary step of sending a letter to Fed Chairman Ben Bernanke asking him to avoid further monetary stimulation. What the Fed would or would not do, should or should not do, as we neared this presidential election has become a hot topic.

While the Fed should have to answer to Congress and the people, its independence is an important part of what it is. And the Fed has come under more and more criticism of late for its policies.

The Fed is an odd combination of public and private personas and responsibilities and much that is written about it is not quite accurate. Is quantitative easing money printing? Many people say it is. Fed Chairman Bernanke says it isn’t.

We operate under many misconceptions regarding the Fed but Chairman Bernanke in a recent speech laid out its responsibilities in a pretty straight forward way. He asks and answers these five basic questions about the Fed and monetary policy:

  1. What are the Fed's objectives, and how is it trying to meet them?
  2. What's the relationship between the Fed's monetary policy and the fiscal decisions of the Administration and the Congress?
  3. What is the risk that the Fed's accommodative monetary policy will lead to inflation?
  4. How does the Fed's monetary policy affect savers and investors?
  5. How is the Federal Reserve held accountable in our democratic society?

 Take a look at it. You may or may not agree with its policy decisions but after you read this you will be better informed regarding what the Fed does and why than most folks.


About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.