o Fiscal policy adjustments through tax, spending, and borrowing policy tend to be slow and must be carefully negotiated.
o Monetary policy can be implemented in a timely and technocratic manner.

Hence the conventional wisdom:
o Focus fiscal policy decisions on the medium and longer run.
o Delegate monetary policy to an independent authority

Financial crisis aftershocks have introduced a “creeping politicization” of central banking globally.
o The macroeconomic performance of nations with politicized central banks has historically been quite poor.
o One live example of the current trend is the ECB’s OMT program.
o One interpretation of the OMT is that it is a fiscal-type operation, and that ordinary monetary policy has become part of the negotiation over the fiscal package.
o This has altered the response of the ECB to the European recession.

It may turn out to be optimal for central banks to guarantee fiscal authority debts in some situations. If so, we again have to think of price level determination as something that is done jointly by the fiscal authority and the central bank

I have no intention of supporting, under political pressure, the monetizing of the debt.. [That would be] a central banker’s cardinal sin.

The ability to make monetary policy decisions that are free of short-term political influence is critical for central banks. This is especially true because the effective conduct of monetary policy requires a long-term perspective. A central bank that is subject to political pressure might opt for policies that favor rapid expansion in the near term at the expense of higher inflation in the future. Such actions would surely result in the loss of the confidence and credibility that are needed to achieve the objectives of monetary policy.

[P]olicymakers in a central bank subject to short-term political influence may face pressures to overstimulate the economy to achieve short-term output and employment gains that exceed the economy's underlying potential. Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind only inflationary pressures that worsen the economy's longer-term prospects. Thus, political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.

Such amendments [that would broaden audits of the Fed], if enacted, would seriously threaten monetary-policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation

[E]rosion of Fed independence could result in a 1970s-style period of volatility. The consequences for the U.S. and the global economy would be large. No one would be served well by this outcome.

I don't think that's the right way to go. I think we want to maintain accountability through the Board of Governors which then oversees the system and that is really the appropriate way for us to be accountable to the Congress, which we will be. We want to be completely open and transparent to the Congress on all financial matters but we do need to maintain our independence on our policy decisions.

In response to a question about the proposal to make the FRBNY president a political appointee.

We're independent — there is no constituent that is requiring us to vote for political reasons one way or another. We're voting based on our judgment of how the economy is going to unfold and to meet the two mandates that we have, and that is sustainable economic growth and price stability. Making that process political, I think, would be devastating to our country. Financial markets around the world would become concerned about the credibility and integrity of our system and economy.

I do believe that an independent Fed is good our economy and critical for the implementation of monetary policy.

"Depending on your assumptions about the economy, that federal debt will grow at an unsustainable level starting immediately, or in a very few years,” Hoenig said. “We do have significant private debt, so that’s in place, so what worries me about that [is] that puts pressure on the Fed to keep interest rates artificially low as you try to deal with that debt.”

In a C-SPAN interview, as reported by the Wall Street Journal

To promote a clearer distinction between monetary policy and fiscal policy and to help safeguard the Fed's independence, I advocate that we implement monetary policy using a portfolio that contains only Treasury securities, preferably concentrated in bills and short-term coupon bonds. Like Ulysses and the Sirens, the Fed could help preserve its independence by limiting the scope of its ability to engage in activities that blur the boundary lines between monetary and fiscal policy. Thus, as the economic recovery gains strength and monetary policy begins to normalize, I would favor our beginning to sell some of the agency mortgage-backed securities from our portfolio rather than relying only on redemptions of these assets. Doing so would help extricate the Fed from the realm of fiscal policy and housing finance. It will take some time for the Fed's portfolio to return to its pre-crisis composition, but we should begin taking steps in that direction sooner rather than later.

The Canadian experience in the second half of the 1990s is suggestive of the third—and the only responsible—way to resolve our growing fiscal imbalance: By addressing its source in an environment of price stability. All seem to agree this is the way we would prefer to go, but of course the devil is in the details. At the outset, it requires an institutional framework committed to having an independent central bank. This discourages the fiscal authority from turning to its central bank and should it do so, strengthens the bank’s ability to say “no.”

Some observers argue that the financial reform agenda should include changes in the role and governance of the Federal Reserve...   I know it might sound self serving for a Fed insider to object to such changes, but I believe such moves would present very serious risks to the effectiveness of monetary policy and ultimately to economic growth and stability...  The governance of the Federal Reserve System balances accountability, with ultimate authority resting in Washington, and independence, with the participation of non-political leaders from throughout the country.  While the performance of our economy in the last two years has clearly been unsatisfactory, and policy mistakes may have contributed to our problems, the Fed's balanced, hybrid governance structure has, I believe, given us a good record over the better part of three decades. Disrupting that balance would pose another long term challenge for our economy.

Independent does not mean unaccountable. In its making of monetary policy, the Fed is highly transparent, providing detailed minutes of policy meetings and regular testimony before Congress, among other information. Our financial statements are public and audited by an outside accounting firm; we publish our balance sheet weekly; and we provide monthly reports with extensive information on all the temporary lending facilities developed during the crisis. Congress, through the Government Accountability Office, can and does audit all parts of our operations except for the monetary policy deliberations and actions covered by the 1978 exemption. The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation.