Protecting Federal Reserve Independence From Political Interference

Key Quotes

"The subpoenas prompted Powell to release an uncharacteristically strong statement the threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public rather than following the preferences of the president."

This quote highlights Federal Reserve Chair Jerome Powell's reaction to the Department of Justice's subpoenas. NPR's Scott Horsley explains that Powell issued a strong statement indicating that the investigation's criminal charges are a result of the Fed making policy decisions based on public interest, not presidential demands. This demonstrates Powell's stance on maintaining the Fed's independence.

"Adam Posen is president of the Peterson Institute for International Economics he studied central bank independence for a very long time he says government should treat monetary policy makers like surgeons or airline pilots the patient or passenger must let them work and evaluate their performance based on the results."

Adam Posen, an expert on central bank independence, uses an analogy to explain the importance of allowing monetary policymakers to operate without interference. Posen argues that, similar to how one would trust a surgeon or airline pilot to perform their duties, the public and government should allow central bankers to make decisions based on their expertise and then evaluate their performance based on outcomes. This illustrates Posen's view on the necessary operational autonomy of central banks.

"I think they do if you weaponize the Department of Justice on people who you happen to disagree with it's contrary to rule of law and leads to bad outcomes and even if the court cases don't hold up it means that people get harassed get intimidated specifically with respect to the Fed and independence there is this tendency to have it as this abstract thing independence isn't abstract here independence in this case is what we call operational independence."

Adam Posen explains the danger of using the Department of Justice for political pressure. Posen asserts that weaponizing the DOJ against those with differing views undermines the rule of law and leads to negative consequences, including harassment and intimidation. He clarifies that the Fed's independence is not an abstract concept but rather "operational independence," meaning the ability to function without undue external influence.

"When an elected executive tries to put pressure on the head of a central bank you end up with higher inflation because they get them printing money at times when it's not justified for purposes to pay off things the elected official wants this kind of political propositioning then leads people to expect inflation and that becomes self fulfilling and you create a situation where people expect inflation and you just get more inflation which is bad for the country."

Adam Posen details the economic consequences of political pressure on central banks. Posen explains that when elected officials pressure central bank leaders, it can lead to unjustified money printing to fund political agendas. This, in turn, can foster expectations of inflation, creating a self-fulfilling prophecy that results in higher and more persistent inflation, ultimately harming the country's economy.

"I think Chair Powell who has been extremely restrained and careful under huge attacks on him as mentioned Governor Cook Vice Chair former Vice Chair Mike Barr and others on the Fed is finally realized that he had to draw a line and he had to make an appeal that would lead to Congress getting involved and realizing what's at stake and he had to make an appeal so that the public and markets would see that this was at least as unprecedented for the president to do something like this."

Adam Posen interprets Chair Powell's shift in communication strategy. Posen suggests that Powell, after enduring significant criticism, recognized the need to publicly address the situation and appeal to Congress and the public. This change in approach, Posen believes, was an effort to highlight the unprecedented nature of presidential interference and underscore the stakes involved.

"I think it does I think I think like a lot of things that have gone on in the economics sphere and other spheres under the Trump administration this administration this term you're making pretty irreversible changes to how much people can trust in the power of institutions."

Adam Posen reflects on the long-term impact of the Trump administration on institutional trust. Posen posits that actions taken during this term are causing irreversible damage to public confidence in institutions, not just in economics but across various spheres. This suggests that the erosion of trust is a significant and lasting consequence of the administration's approach.