Federal Reserve Independence

One of the major political issues on the national stage just now is the independence of the Federal Reserve Banking System. As someone who taught money and banking to college students for several decades, I am pretty convinced that the independence of the central bank of any country is vital to its long-term economic health and financial stability.

Virtually every president fancies himself (or maybe someday herself) to be the best judge of what’s best for the country, but that judgment of presidents is clouded by their four-year or eight-year time in office. Most of us have longer economic planning horizons than that however. While presidents want the economy to be in peak shape in the year they face re-election, the rest of us need it to remain in peak shape for a lot longer, at least until we retire, and that may mean for decades!

That longer-term thinking is built into the way the Federal Reserve System functions. Its legal mandate is to focus monetary policy (largely guided by targeting interest rates) on keeping both unemployment rates and inflation rates low. The law that created the Federal Reserve does not specify how low either of those should be. So the Federal Reserve sets targets for those and justifies them to Congress, which exercises limited oversight of “the Fed.”

Presidents only have authority to appoint the Chair of the Fed and six other board members (called governors). The Fed’s Chair serves a four-year term, and the other governors serve 14year terms, one expiring every two years. President Trump just now appears to want to “fire” the Fed’s Chair, Jerome Powell, even though he first appointed him seven years ago, because Powell has not more aggressively pursued lowering of interest rates. Of course, some of us with income from CD’s or bonds are benefited by higher interest rates.

But in any case, keeping interest rates low is not the Fed’s job: fighting inflation and avoiding high unemployment are its legally binding goals. Sometimes higher interest rates are needed to put the economy on the right track. On the other hand, sometimes interest rates that are too low can cause all sorts of problems. When interest rates are too low, for example, individuals and businesses can take on too much debt, debt that might be unsustainable in later years and then lead to higher bankruptcy rates and a serious recession.

It’s the Fed’s job to monitor economic conditions, to take stock of expected changes or shifts in economic trends, and to then adjust interest rates when needed to keep unemployment and inflation within the targeted range. To do otherwise, even at the behest of a president facing mid-term elections next year that will determine whether Congress remains controlled by the Republicans or not, would be madness and a violation of the Fed’s obligations to the nation as a whole.

Jerome Powell will be just fine personally, whether President Trump succeeds in firing him before his term is up or not. The United States economy, and the work of the Federal Reserve System may not be in such fine shape if the Fed loses its independence of political pressure from the White House. An individual politician, whose preferences are dictated by shortterm political pressures, has no business setting Federal Reserve monetary policy. Yes, dear readers: I know you did not elect the Federal Reserve Board members. But you’d be worse off, by far, if you did.

We don’t want people serving there to be buffeted by every two-year election cycle, changing their policies whimsically, based on who’s winning control of Congress or the White House. Your own economic well-being needs to have someone with our country’s longer-term economic interests as its priority.

Leave the Fed to make those decisions, please, without presidential pressure. In the long run, we’ll all be glad an independent Federal Reserve was looking after our interests, and not someone we elected to just a four-year term in the White House.