The Federal Reserve System Works!

In light of the Fed Chairman testifying before Congress today, I found this article to be very interesting:

Fed is shielded from politicking

The important lesson from Federal Reserve news this week is a fundamental one: Our central bank system basically works well.

Regardless of Fed Chairman Ben Bernanke’s testimony before Congress or what the Fed’s Open Market Committee decides in three weeks, the compromise struck when the system was set up was a good one. It insulates monetary-policy decision-making from short-term political pressures while maintaining the Fed’s accountability to government.

This fundamental structure of the Fed is more important than the stock markets’ enthusiastic response Wednesday to Bernanke’s testimony — the Dow gaining almost 2 percent and the Nasdaq rising more than 1.8 percent. Traders obviously interpreted the chairman’s remarks to mean that the central bank is less likely to continue restricting growth of the money supply.

Less tightening means smaller increases in short-term interest rates and presumably fewer restraints on consumer spending and business investment. This is good economic news to the extent that inflation is under control. If it were not under control, however, a less restrictive policy merely provides short-term enjoyment at the expense of long-term pain.

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