kevin warsh : an ode to independence speech by mr kevin warsh, member of the board of governors of the federal reserve system, at the shadow open market committee, new york, 26 march 2010. * * * thank you for welcoming me to a meeting of the shadow open market committee. 1 the overall profitability and balance sheet strength of large u. s. enterprises is impressive at this stage of recovery. equity prices and credit terms in liquid markets corroborate these improved fundamentals. and for these firms, financial market conditions appear quite supportive of economic growth. still, significant economic challenges persist. while recent trends in personal consumption and business investment trends are positive, the underlying strength of the economy over the medium term is less clear. unemployment remains high, and stubbornly so. small and medium - sized enterprises, which have tended to lead recoveries, are still hesitant to expand – revenue growth is tepid, costs are uncertain, and credit conditions remain more difficult than for large firms. increases in government expenditures around the world – ostensibly instituted as a bulwark against further economic weakness – are raising fiscal deficits significantly. unsustainable, projected fiscal debt loads – including large and growing implicit guarantees bestowed upon large financial firms by governments – are raising concerns in sovereign debt markets. taking account of the broad range of economic and financial conditions, there is no wonder that the electorate – in the united states and abroad – is unnerved. the uncomfortable juxtaposition of financial and economic realities has caused some fundamental precepts of the so - called anglo - american economic model to be attacked. allow me to join your discussion on an increasingly questioned foundation of our economic system, the independent status of central banks. institutional credibility at stake monetary accommodation from the world ’ s largest central banks remains extraordinary. policy decisions made in response to the global financial crisis resulted in dramatic changes in the size and composition of central bank balance sheets. the federal reserve ’ s balance sheet has nearly tripled, including about $ 1. 2 trillion of new mortgage - related securities, matched by a rise in excess reserve balances. yet, the federal reserve ’ s most significant asset, like many other central banks, is not on its swollen balance sheet. neither can it be found in the lengthy footnotes of its audited financial statements. nor is it tucked away in the recesses of the federal reserve act, like the longdormant, now renowned, section 13 ( 3 ). the fed ’

s greatest asset is its institutional credibility. this institutional credibility is rooted in its inflation - fighting credibility, but it is broader still. 2 it is tied up in the full range of fed the views expressed here are my own and not necessarily those of my colleagues on the board of governors or the federal open market committee. nellie liang and dan covitz of the board ’ s staff contributed to these remarks. in the economics literature, central bank credibility generally refers to its reputation for being more averse to inflation than the fiscal authority. the broad consensus is that credibility along this dimension allows better economic outcomes. credibility anchors inflation expectations, which in turn allows the central bank to keep actions and balance sheet commitments. this credibility is essential. it increases the heft of our communications. it gives weight to our economic assessments. it amplifies the effect of announced changes in the short - term policy rate on longer - term rates. it is, in some sense, the real money multiplier in the conduct of policy. given its immense value, we should not forget that the federal reserve ’ s hard - earned credibility is no birthright. it is as much nurture as nature. it was earned by our predecessors in the conduct of their duties, making considered judgments consistent with the statutory mandate of price stability and maximum employment. fortunately, for the asset to be burnished and bestowed upon the current crop of central bankers, it did not demand perfect clairvoyance or infallible judgments. but it did require fierce independence from the whims of washington and the wants of wall street, and from a pernicious short - termism that can undermine the proper conduct of policy. this fierce independence is needed, perhaps now more than ever. central bank independence is precious. it can be taken for granted in benign times, but it is tested when times get tough. and we still have tough times ahead of us. my colleagues and i must demonstrate that fed independence has not been relegated, and the fed ’ s long - term objectives not compromised. ensuring fed independence – as the cornerstone of institutional credibility – is our charge to keep. it is central to what the federal reserve represents, and to how policy is conducted. the mantra of fed independence is not some throw - away line that seeks to absolve the central bank of accountability. to the contrary, institutional credibility demands transparency so that the fed ’ s performance of its responsibilities can be judged on the merits. but, the call for central bank