Economists Warn Fed Independence at Risk

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More than 175 prominent economists warned that politicians' attacks on the Federal Reserve are putting "the independence of U.S. monetary policy…at risk," and urged Congress to back off lest it undermine the Fed's ability to manage the economy and thwart inflation.

The 185-word petition, initiated by a band of academic economists, reflects growing unease among professors, former Fed officials and some investors that the vehemence of the criticism from Congress of the Fed's handling of the financial crisis suggests a readiness in Congress to weaken the freedom the Fed has to move interest rates as it sees fit.

Congress has sharpened criticism of the Fed's actions, specifically Chairman Ben Bernanke's handling of Bank of America Corp.'s hesitation late last year to complete its purchase of Merrill Lynch and unusual Fed loans to American International Group Inc.

The move to publicly defend the Fed's role reflects growing unease among academic economists, former Fed officials and some investors that the vehemence of the criticism from Congress of the Fed's handling of the financial crisis suggests a readiness in Congress to weaken the freedom the Fed has to move interest rates as it sees fit.

"This was triggered by two concerns," said Anil Kashyap, a University of Chicago finance economist who was among the initiators of the petition. "The interactions with Congress are becoming increasingly hostile. Competent monetary policy needs to be forward looking. So at some point the Fed is going to have to act to tighten policy before the economy is booming. If that gets stopped for political reasons it would be a disaster and just the perception that it might be stopped could be costly."

Arguing, as economists commonly do, that the independence of the central bank is "essential for controlling inflation," the petition urges Congress not to interfere when the Fed decides to raise short-term interest rates or reverse its purchases of Treasury debt and mortgage-backed securities, which will tend to push up longer-term interest rates.

"Sooner or later, the Fed will have to scale back its current unprecedented monetary accommodation," the statement said. "When the Federal Reserve judges it's time to begin tightening monetary conditions, it must be allowed to do so without interference," the economists said.

The economists' statement also raised the possibility that proposals to reshape the Fed or alter its current governance could erode confidence in its ability to thwart inflation.

"Calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery," it said.

Among other things, some members of Congress have proposed to extend the powers of the General Accounting Office, the investigative arm of Congress, to audit Fed monetary policy, and others have questioned the legitimacy of the governance of the 12 regional Federal Reserve banks, which are overseen by private-sector boards of directors, the majority of whom are chosen by local commercial banks.

The petition, which is still circulating, has been signed by three winners of the Nobel Prize in economics—Daniel McFadden, Robert Merton and Eric Maskin—and five former presidents of the American Economics Association as well as the current president, Angus Deaton of Princeton University and the president-elect, Robert Hall of Stanford University. The president of the American Finance Association, Darrell Duffie of Stanford, and four of his predecessors also have signed, as have two former Fed governors, Laurence Meyer and Frederic Mishkin, and a former president of the Federal Reserve Bank of San Francisco, Robert Parry.

President Barack Obama is proposing to broaden the Fed's responsibilities to oversee the stability of the financial system and to monitor financial institutions whose failure would threaten it. Some analysts fear this would dilute the Fed's focus on keeping prices stable.

"If Federal Reserve is given new responsibilities," the economists said, "every effort must be made to avoid compromising its ability to manage monetary policy as it sees fit.

Write to David Wessel at capital@wsj.com