Fed's Powell rejects Treasury-Fed cooperation as threat to central bank independence

Federal Reserve Board of Governors member Jerome Powell listens during an open board meeting at the Federal Reserve in Washington December 14, 2012. REUTERS/Kevin Lamarque

By Howard Schneider WASHINGTON (Reuters) - Federal Reserve board member Jerome Powell said on Tuesday he feared any move for the Fed and the U.S. Treasury to cooperate on debt management and other issues would undermine the central bank's independence and should be avoided. Powell was responding to research by a team of Harvard economists concluding that the Treasury's effort to ramp up its sales of longer-term bonds in recent years undercut the Fed's effort to bring down long-term rates through quantitative easing. The economists, including former Treasury Secretary Lawrence Summers, suggested the two agencies coordinate - particularly in a crisis - to be sure the government's debt management plans and the Fed's monetary policy are in synch. That proposal "seems to me to be fraught with risk for the Federal Reserve," said Powell, noting that when the Fed and Treasury did cooperate in the years after World War Two it cut into the Fed's independence. "There is considerable evidence that monetary policy independence leads to better macroeconomic outcomes. Any active collaboration between debt management and monetary policy, even in a crisis, would risk calling into question that independence," Powell said. He downplayed the group's conclusion that Treasury's debt management undercut the impact of the Fed's quantitative easing. He said, for example, that quantitative easing sent a strong signal to markets that the Fed would stand behind the economy, providing a psychological boost to markets. (Reporting By Howard Schneider; Editing by Andrea Ricci)