Central bank bashing

Fed independence: The Federal Reserve has as much impact on the United States as the Supreme Court. Yet candidates for its board are treated far more gingerly by Congress. The Senate's decision to take the surprising step of blocking Peter Diamond's nomination hints that courtesy may be becoming a thing of the past. It also bodes poorly for the future of central bank independence.

On the surface, Diamond seems a pretty uncontroversial fellow. He's a professor at the Massachusetts Institute of Technology specializing in tax policy and Social Security. But Republicans on the Senate Banking Committee never quite took a shine to him. Richard Shelby, the committee's top Republican, knocked Diamond for not being a monetary policy expert, saying that in such an uncertain economy, the Fed's board couldn't afford governors who needed to be "learning on the job."

Diamond's real offense, however, may be his stated concern that the biggest risk to the U.S. economy is deflation, not inflation. That view runs contrary to what many in the GOP argue. The commonly held conservative view is that the country's record budget deficits are setting the stage for a terrible bout of rising prices.

But it's important to remember what else can affect inflation - or at least inflation expectations. And that's a perception that a nation's central bank may be subject to political influence and manipulation.

During the financial reform debate, there were legislative attempts to require expansive audits of Fed operations. Some on Capitol Hill also want to restrict monetary policymaking to the Fed governors in Washington and exclude the hawkish regional bank presidents. And there has been a visible rise in the aggressiveness of congressional questioning of Fed chairman Ben Bernanke.

Politicians surely have noticed the decline in public support for the Fed. But they shouldn't so quickly jump on the bandwagon. A confident and independent Fed will be especially important in the years to come as the bank withdraws monetary support despite an economy that may still be in a funk. President Obama may yet resubmit Diamond for approval. If so, Congress should think twice before sending him home again.