Narayana Kocherlakota, the former head of the Federal Reserve Bank of Minneapolis, argues at Bloomberg Wednesday that the Fed is losing its role as the leading manager of the economy. Near-zero interest rates mean that politicians in Congress and the White House are now in charge, with fiscal policy as their primary tool.
“For the past 40 years, the central bank’s unelected technocrats have been able to fight recessions relatively free of politics, because they have focused on whether to toggle a single policy instrument – short-term interest rates – up or down. Now, the government will have to step in with fiscal policy – that is, spending financed by sovereign borrowing. Its tools come in all shapes and sizes, and the choice among them will be highly political.”
Although he’s hardly a neutral observer, Kocherlakota says that given the degree of polarization in American politics, there’s a good chance “that we’ll come to miss the good old days, when the technocrats at the Fed were in charge.”