Making Federal Reserve Monetary Policy Transparent and Accountable

The Fed defends its independence based on the argument that an apolitical monetary policy brings stability to the economy. The Fed may be right, but how confident should the public be that the monetary arrangements that provide for economic stability are firmly in place now and in the future? To provide this assurance, policymakers should be able to explain what macroeconomic variables they control and how they exercise that control. What are the limits to their powers? The explanation should abandon the atheoretical language that focuses on near-term forecasts of the economy. Instead, it should use the general structure of a model to clarify how the Federal Open Market Committee exercises the control over the behavior of firms and households required to achieve its objectives. This explicitness would allow for an assessment of how well the monetary policy regime does in practice to provide for economic stability. It would also promote the durability of a successful regime. Finally, such transparency is required in a democracy.