Federal Reserve Chairman Jerome Powell recently extolled the importance of central bank independence. “Perhaps most importantly from my perspective as Fed Chair,” said Powell, “he is responsible more than any other person for the fact that the United States today has an independent central bank — a central bank able to make decisions in the long-term best interest of the economy, without regard to the political pressures of the moment.” This is a worthy ideal. But on further inspection, it turns out that the Fed’s commitment to that ideal, considered historically, is lukewarm at best.
The Fed has always been a creature of politics. The much-lauded Fed–Treasury Accord, the event that supposedly gave birth to the modern, politically independent Fed, merely marked a new stage in the manner in which politics would impinge on central banking. While the Fed would no longer de facto underwrite Treasury securities, it instead shifted toward a system of social-managerial control with its chief policy makers at the helm.
Repeated bailouts of financial organizations, both traditional banks and otherwise, over decades demonstrated the Fed’s allegiance to special interests. These interests, nominally private but with a significant presence in Washington, were not a bug in the monetary policy operating system. They were a feature. Using key financial organizations as agents of monetary policy was and is crucial for the Fed’s maintenance of macroeconomic control. It is absurd to think this kind of operating environment can be de-politicized.
The Fed doesn’t want to be independent from politics. It just wants to be independent from any kind of political force that would turn a critical eye to its dealings. Perhaps the best evidence of this is the lukewarm support at the Fed over decades for a true monetary policy rule. The best way to get all politics out of monetary policy is to minimize discretion in monetary policy. If the Fed had to follow a strict monetary rule that it could not itself reinterpret or change, the incentive of both private and public interests to meddle with the Fed would significantly decrease.
Suggest this to monetary policy makers with actual power, however, and they become indignant. Monetary policy is far too complex to be subjected to a simple rule, they claim. While monetary policy makers should subject themselves to some constraints, they supposedly need discretion to deal with out-of-left-field events, like nascent financial crises. This “constrained discretion” represents the best of both worlds, according to them.
Don’t believe them. Constrained discretion is just discretion by another name. Tinkerers want to tinker, and a rule would prevent them from tinkering. “It is difficult to get a man to understand something, when his salary depends on his not understanding it,” Upton Sinclair famously quipped. This is as true for macroeconomists with Ph.D.s as anybody else.
If the Fed really wants political independence, the solution is a constitutional separation between the central bank and the ordinary organs of politics, through creation of binding rules. But it doesn’t want that. Again, it is far too attached to macroeconomic control to relinquish that control. But the more discretion it has, the more private and public interests, whose incentives diverge from the common good, can interfere.
One point in Chairman Powell’s favor: he is right to push back against President Trump’s absurd claims that all that is holding the economy back is the Fed’s refraining from running the printing presses. But Chairman Powell’s ideal operating environment most likely looks the same as every other Fed chair’s operating environment: one where the Fed is left alone to treat the economy like a Lego set.
Both strongman populism and oligarchic technocracy are odious, and contrary to the foundations of a constitutional republic. The solution is obvious: cut them both down with one fell swoop, by embracing true monetary rules!