Prof. John H. Cochrane, writing in the Jan. 25 issue of the Hoover Digest:
Momentous changes are under way in what central banks are and what they do.
We're accustomed to thinking that central banks' main task is to guide the
economy by setting interest rates. Their main tools used to be "open market"
operations, that is, purchasing short-term Treasury debt, and short-term lending
Since the 2008 financial crisis, however, the Federal Reserve . . . has
crossed a bright line. Open-market operations do not have direct fiscal
consequences, or directly allocate credit. That was the price of the Fed's
independence, allowing it to do one thing—conduct monetary policy—without
short-term political pressure. But an agency that allocates credit to specific
markets and institutions, or buys assets that expose taxpayers to risks, cannot
stay independent of elected, and accountable, officials.
In addition, the Fed is now a gargantuan financial regulator. Its inspectors
examine too-big-to-fail banks, come up with creative "stress tests" for them to
pass, and haggle over thousands of pages of regulation. When we imagine the Fed
of ten years from now, we're likely to think first of a financial czar, with
monetary policy the agency's boring backwater.