November 7, 2017 Reading Time: 2 minutes

Last week, President Trump appointed Jerome Powell to head the Federal Reserve. Much could be (and has been) said about the decision. Stephen Williamson maintains that, “[i]f Powell had not been appointed to the Board in 2011, nobody would be thinking of him as a candidate for the Chair’s job now.” Peter Conti-Brown suggests the decision erodes the political norm of Republican presidents reappointing Democrat appointees and Democrat presidents reappointing Republican appointees. Indeed, the decision seems to have revived fears that Trump will end the era of central bank independence. As Eswar Prassad remarked in the run up to the decision, “The Fed’s independence […] is crucial for sustaining investors’ confidence in the dollar. […] any act that undermines the Fed’s independence could seriously damage the institutional framework upon which U.S. economic strength rests.”

There is certainly much scope for Trump to change the political leanings of the Fed. He is set to make no fewer than four appointments to its seven-member Board. And, if Yellen resigns (as Chairs failing to gain reappointment have done in the past), he will have selected all but two members–one of whom (pending confirmation in the Senate) he has raised to Chair. It is hard to predict whether Trump will make the most of these appointments. His first Board appointment, Randy Quarles, was an establishment pick who held financial policy positions under both Bush administrations. But, even if he does radically reshape the Fed, the effect on the institution’s independence is unclear.

It cannot be true that “[t]he Fed has international credibility precisely because it is independent from any political master,” as Prassad claims. It cannot be true because the Fed is not independent from any political master. The Fed is nominally independent, to be sure. It is not an agency of the federal executive departments nor the Executive Office of the President. But it is not independent from political influence. Indeed, it is not even independent relative to other central banks around the world.

Don’t take my word for it. Look at the data. In a recent study, Ana Carolina Garriga offers two measures of central bank independence. Out of 179 countries, the US ranked 138 and 156 in 2012. Her results are in line with earlier rankings, which put the US at 82, 83, 84, and 87 out of 89 countries in 2010.

We can debate whether Trump undermines the Fed’s independence. But we should first acknowledge that we are starting from a low base. As much as economists might want it to be otherwise, the Fed is not independent. It is subject to political pressure like other agencies.

William J. Luther

William J. Luther

William J. Luther is the Director of AIER’s Sound Money Project and an Associate Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular writings have appeared in The Economist, Forbes, and U.S. News & World Report. His work has been featured by major media outlets, including NPR, Wall Street Journal, The Guardian, TIME Magazine, National Review, Fox Nation, and VICE News. Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.  

Selected Publications

Cash, Crime, and Cryptocurrencies.” Co-authored with Joshua R. Hendrickson. The Quarterly Review of Economics and Finance (Forthcoming). “Central Bank Independence and the Federal Reserve’s New Operating Regime.” Co-authored with Jerry L. Jordan. Quarterly Review of Economics and Finance (May 2022). “The Federal Reserve’s Response to the COVID-19 Contraction: An Initial Appraisal.” Co-authored with Nicolas Cachanosky, Bryan Cutsinger, Thomas L. Hogan, and Alexander W. Salter. Southern Economic Journal (March 2021). “Is Bitcoin Money? And What That Means.”Co-authored with Peter K. Hazlett. Quarterly Review of Economics and Finance (August 2020). “Is Bitcoin a Decentralized Payment Mechanism?” Co-authored with Sean Stein Smith. Journal of Institutional Economics (March 2020). “Endogenous Matching and Money with Random Consumption Preferences.” Co-authored with Thomas L. Hogan. B.E. Journal of Theoretical Economics (June 2019). “Adaptation and Central Banking.” Co-authored with Alexander W. Salter. Public Choice (January 2019). “Getting Off the Ground: The Case of Bitcoin.Journal of Institutional Economics (2019). “Banning Bitcoin.” Co-authored with Joshua R. Hendrickson. Journal of Economic Behavior & Organization (2017). “Bitcoin and the Bailout.” Co-authored with Alexander W. Salter. Quarterly Review of Economics and Finance (2017). “The Political Economy of Bitcoin.” Co-authored with Joshua R. Hendrickson and Thomas L. Hogan. Economic Inquiry (2016). “Cryptocurrencies, Network Effects, and Switching Costs.Contemporary Economic Policy (2016). “Positively Valued Fiat Money after the Sovereign Disappears: The Case of Somalia.” Co-authored with Lawrence H. White. Review of Behavioral Economics (2016). “The Monetary Mechanism of Stateless Somalia.Public Choice (2015).  

Books by William J. Luther

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