Question

William McChesney Martin, chair of the Federal Reserve from 1951-1970, famously said that the job of the Federal Reserve is “to take away the punchbowl just as the party gets going.”

A) What does this mean?

B) What are the consequences of failure to do fulfill this job?

C) How does this highlight the reasoning that elected officials should not be involved in monetary policy?

Please help with A, B, and C. Thank You.

Answer 1

A. This famous quote from former US central bank - federal reserve - "to take away the punchbowl just as the part gets going" indirectly refer to the job of the central bank, which is to act necessary monetary policy decision as and when required, despite what the people think without the full information on the economy.

1950s and 1960s are the days when the central bank was not as openly comes out in the media / by politicians as it's now ( US President Donald Trump saying ' Powell is th enemy to the US economy' an example). Federal reserve does its duty of controlling the inflation in the economy and make sure it does not go out of the path. They doesn't care whether their actions will crash he stock market or boom the stock market. They only care about the economy and their inflation targeting and their duty on increasing or decreasing stimulus to the economy.

B. This famous quote was said when the market was not expecting the US Fed to reduce its stimulus, but th Fed was cutting it's stimulus. If the central bank fail to do it's job by succumbing to the pressure from the bureaucrats / market forces then the long term impact would be very dangerous to the economy. Though it would look like a good decision in the short run ( which is only focused by the politicians, stock market players, etc), it'slong run impact would be disastrous (which the federal reserve can see with the forecast of the available information in the economy like inflation, growth, employment etc).

Ç. Why elected officials should not involve in monetary policy - elected people face the people when they go for vote campaign. They are bound to give promise which would make public to vote them(even if it's not good for the future of the economy - eg- lowest interest rate even when their is high inflation, contain the inflation without hiking the interest rate, always a weak currency to sooth the exports community etc). They also would face the public again and again for every election. If they promise and do not deliver they have the risk of not getting re elected. So they always try on vote bank and not the long term impact of their actions in the economy. But the people who take monetary policy does not have this pressure. Their only aim is the welfare of the economy. They know that few actions will bring short term trouble to the public - like when interest rate is increased that will reduce the growth and increase the loan interest for general public but without increasing interest rate it would be difficult for them to control the inflation).