Is the Fed dead?
The Becker/Posner blog grimaces at the Federal Reserve’s lack of independence. Yes, says Becker, the normal political pressures faced by central banks become overwhelming during crises. “So the rather complete bending of the Fed to the Treasury’s wishes during the present worldwide recession is not surprising,” Becker concedes. But he doesn’t like it, and in particular he thinks it will create very difficult problems for the Fed when the economy recovers.
He particularly fears the inflationary potential caused by the swell in bank reserves from about $8 billion to about $800 billion. Longer-term, he sees higher interest rates as an inevitable consequence of the stimulus plan, and a Fed stuck between choosing recession and inflation.
Posner’s post on the same topic goes on at length, and seems less troubled (but not untroubled) by the Fed’s manuevers and obvious lack of independence.