Lacker, Jeffrey

Central bank independence is now widely recognized as an important mechanism for insulating monetary policymaking from inflationary political pressures, and allowing it to respond quickly to short-run macroeconomic developments.

This observation led my former colleague, Marvin Goodfriend, to argue 15 years ago for transferring much of the Fed’s lending activities to the Treasury. He wrote:

“Congress bestows such independence only because it is necessary for the central bank to do its job effectively. Hence, the presumption ought to be that the Fed should perform only those functions that must be carried out by an independent central bank.”¹⁰

While both the Fed and the Treasury can extend credit, only the Fed issues money. Thus, the Fed’s primary focus should be the management of its monetary liabilities.

Goodfriend advocated an understanding or agreement between Fed and Treasury on credit policy, analogous to the 1951 Accord.¹¹ A new “credit accord” that assigns to the Treasury the responsibility for all but very short-term lending to solvent institutions would have a number of advantages, I believe.