The Federal Reserve is not, and should not be, independent

Tim Fernholz gives voice to some slightly heretical thoughts about pulling Ben Bernanke's renomination as chairman of the Federal Reserve and replacing him with a more full-employment oriented leader, like Federal Reserve governor Janet Yellen. But no, you gasp! That would be influencing the Fed!

Well, yes:

Right now, unemployment is a much larger problem than inflation, and creating a specific inflation target would, as Paul Krugman puts it in his discussion of the Japanese case in the 1990s, allow "the central bank to credibly promise to be irresponsible -- to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs." Negative real interest rates would be the step beyond the zero-interest rate policy that the Fed is following right now, which is not enough to provide a significant monetary expansion to allow for employment growth.

Bernanke could, conceivably, do something along these lines. But he hasn't yet. On the other hand, if you wanted someone who could credibly promise to be "irresponsible," at least from the view of monetary policy hawks, why not pick someone who Bond Vigilante-types already think is irresponsible (read, cares about unemployment), like San Francisco Federal Reserve President Janet Yellen? Some might claim that this would damage the Fed's "political independence," but actually making use of the main check that the government has over the Fed -- appointing the chairman -- should be seen as within the normal bounds of Fed-government relations.

There are reasons to avoid doing this, of course. As Fernholz admits, the financial markets would freak out, and Obama doesn't want that. And I don't have much of an opinion over whether Bernanke should continue serving or be replaced. But Fernholz's structural point is important: The Federal Reserve is insulated from politics, but it is not, in fact, independent, and nor is it supposed to be.

Presidents need not be afraid of appointing chairmen who represent a break from their predecessors or fall closer in line with the administration's priorities. Indeed, that's actually part of their job description. The Federal Reserve is designed to give the chairman distance after he or she is appointed, but the position is appointed precisely in order to give the more democratic branches control over who serves, and influence over what the institution's priorities are. We may live in the Republic of the Central Banker, but even he serves at the pleasure of the presidency.

Photo credit: Brendan Smialowski -- Bloomberg News.