Prof. William English Provides Congressional Testimony on the Fed’s Balance Sheet and Its Independence
English discussed the benefits of the Fed’s current “ample reserve system” and the risks of political pressure on the central bank.
Earlier this month, William English, the Eugene F. Williams, Jr. Professor of the Practice and a former economist at the Federal Reserve, testified about issues currently facing the Fed before the Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity of the U.S. House Committee on Financial Services. The scheduled topic of the hearing, on January 14, was the size of the Fed’s balance sheet, which has remained larger since the Global Financial Crisis of 2007-2009. But responding to questions from members of the committee, English and the other witnesses also commented on the independence of the Fed, which is currently under pressure from the Trump administration on multiple fronts.
In his prepared testimony, English provided a history of the Fed’s decision to maintain a larger balance sheet in the wake of the financial crisis rather than returning to the previous “scarce reserves system.” He said, “When policymakers assessed the overall costs and benefits of the two systems in 2019, they concluded that staying with the ‘ample reserves system’ was preferable.”
During member questions, Representative Juan Vargas asked English about the historical reasons for Fed independence in the context of President Donald Trump’s efforts to remove Lisa Cook from the central bank’s board and the criminal investigation into Fed chair Jerome Powell.
“Congress wanted to ensure the Fed was independent of the president,” English responded, “who might have political and personal incentives that would affect policy in ways that would not be good for the public interest.”
For example, English said, pressure for lower interest rates could lead to inflation. In the 1970s, he noted, Fed chair Arthur Burns “was an adviser and confidant of [President] Nixon. He wanted Nixon to be successful and Nixon put a lot of pressure on Burns to keep policy easy…There are many factors at play but it contributed to the high inflation” of the period.
Watch English’s prepared testimony and his exchange with Vargas:
Later, Representative Cleo Fields asked how diminished independence of the Fed would affect his constituents in Louisiana.
English responded, “I think the risk, Congressman, is that if the president were successful in undermining the Fed’s independence, then monetary policy would be made in the interest of short-term political gain and not in the interests of the objectives set by the U.S. Congress: maximum employment and stable prices. The likely effect is that monetary policy will be too easy. Presidents often call for monetary policy to be easier; they rarely call for monetary policy to be tighter. And so the result would be higher inflation over time…Everyday Americans, as they look at this issue about central bank independence, should be concerned that if independence is undermined, the effect will be higher inflation, higher costs of living, and more uncertainty, more volatility, around the cost of living over time.”
