That is the title of my latest Bloomberg column, here is one excerpt:
Now enter the Fed, which I think of as a tool of Congress and the president. It gives Congress a means of promoting economic growth and stability (one hopes), as well as a path for deflecting the blame if tough decisions must be made. Congress insists that the Fed is “independent,” precisely for this reason. But if voters hated what the Fed was doing, Congress could rather rapidly hold hearings and exert a good deal of influence. Over time there is a delicate balancing act, where the Fed is reluctant to show it is kowtowing to Congress, so it very subtlety monitors its popularity so it doesn’t have to explicitly do so.
If we imposed a monetary rule on the Fed, even a theoretically optimal rule, it would stop the Fed from playing this political game. Many monetary rules call for higher rates of price inflation if the economy starts to enter a downturn. That’s often the right economic prescription, but voters hate high inflation. The Fed would probably lose its political capital if it had to follow through on the rule, and monetary policy would end up politicized for a long time.
Central bank quasi-independence is a quite a fragile institution, and it is maintained only by allowing central banks to juggle lots of balls at once. If you make a rule too tough, even a good rule, sometimes what you get is a rule that snaps and breaks.
Do read the whole thing.