June 30, 2011

Quantitative Easing Leads to Loss of Independence for Federal Reserve

Today, the Federal Reserve concluded its second round of quantitative easing (QE2), a $600 billion bond-buying program. Looking back on the ­­­Federal Reserve’s easing programs, they have accomplished some of what they set out to do. Although pinning down the correspondence is tough, unemployment has roughly stabilized. Similar to when we were debating the first program, QE1, we’re no longer talking about deflation concerns – which would’ve been a major problem.

But perhaps the most lasting effect of QE2, along with QE1 and the Fed’s extraordinary asset purchases during the crisis, is an irreversible loss of independence. Republicans - especially those elected as part of the 2010 wave, are increasingly skeptical of the Fed and its independence.

Although there is strong evidence that this independence is crucial to doing a good job, in the future, the Fed will have to continually make efforts towards transparency and may in fact be more reticent to act, especially under a Republican president.