bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

434 MONETARY ECONOMICS
members of Congress twice a year. However, there is no political representation
at FOMC meetings and a question we raised in relation to the ECB
appears here also concerning the political remedy available if the people are
unhappy with the Fed’s actions.
This brings us back to the question of independence from the financial
sector since financial markets can be seen to be the only part of the economy
capable of damaging the Fed in response to the Fed’s policies. Through
their actions, the financial markets can make it much more difficult for the
central bank to fulfil its mandate and can damage the reputations of central
bankers. We have seen, in Chapter 13, a good example of this in relation to
the value of the euro. The result of this is that the central bank might well
feel itself more accountable to financial markets than to the political system.
It is of interest in this regard that, as we report above, the Fed recently
changed the way in which it expresses its views about the future prospects
of the economy because of concern over the way in which its comments
were being interpreted in the financial markets. This, of course, provides
another reason why the desire expressed in the constitution of the Fed when
it was set up in 1913, that it should be independent of both private financial
business interests and duly constituted government authorities might not, in
practice, be possible.
14.5 The Federal Reserve — recent monetary policy
The year 2001 saw the Fed principally concerned with the weakness of the
US economy. As the US economy headed towards recession, there was no
threat to the goal of price stability, and the Fed saw its task as cutting interest
rates and providing generous liquidity to the banking system in the
attempt to avoid recession. Concern about the future weakness of the economy
intensified following the attack on the World Trade Centre and the
Pentagon on 11 September.
It is clear from the actions and comments of the FOMC that it believes
that monetary policy does have powerful real effects, at least in the short to
medium term. This was despite the fact that the interest rate cuts were well
anticipated by the financial markets. Differences of opinion regarding likely
cuts largely centred on whether the cut would be one-quarter or one-half
of one per cent or on whether the cut would be this or next month. The markets
were never genuinely taken by surprise. This confirms that monetary
policy is thought by practitioners to have powerful real effects whether policy
is anticipated or not. This does not, of course, refute the proposition that
money is neutral in the long run, but market practitioners act as if: