There’s central bank independence and then there’s central bank discretion. Contra some bloggers I do think central bank independence is a good thing. However, I think part of what the current recession has shown is that central bank *discretion* is bad. Sumner, Krugman ect. agree that a lot of pain could have been avoided if the central bank had tried harder to hit their historically implicit target (~2% inflation). The bank should be relatively free from interference from other parts of the government, but the actual policy it follows should be much more constrained.
I propose the following: congress passes a law that requires the central bank to meet a target, and if it fails to meet that target central bank officials would be summoned before congress to explain themselves. However, the actual target would be set by the central bank. The target would be set by vote say every 10 years by the reserve committee (and the vote would be mandatory, to reduce status quo bias, though perhaps allowing the vote to be postponed for less than say 2 years by vote) with the possibility of an emergency change if a super-majority of the committee desires it. The target itself could be anything, a monetary aggregate path, an inflation target, a price level path target, and NGDP path target etc., whatever rule the committee thinks does the best job of promoting a good economy, other than “doing whatever the committee members want”.
The other powers of the Fed could be left intact or not, but this would ensure that they are exercised in a way consistent with the Fed’s target.
The benefits of such a policy would be twofold. First, this policy is more consistent with the Rule Of Law than current policy; it reduces the uncertainty about what macroeconomic policy will be, allowing people and businesses to plan better. Second, it will force the central bank to take a much more theoretical approach to monetary policy than it has without requiring congress to be particularly informed on the subject. Hopefully this will avoid the apparent tendency to throw everything known about macroeconomics out the window during a serious crisis, when it is most valuable. It does both these things while still allowing for the possibility that if some problem with the current rule becomes widely appreciated, the central bank can take quick action to work around it.