Why does the Federal Reserve maintain its independence?
Why does the Federal Reserve maintain its independence?
A lot of folks like to weigh in on what the Federal Reserve should be doing with interest rates; economists, think tanks and this week, former President Donald Trump said he thinks as president, he should be able to have a say in setting monetary policy. But currently, the Federal Reserve enjoys relative independence from partisan politics. So how exactly does this insulation of the Central Bank from political headwinds help the U.S. economy run?
There’s been a sliding scale of influence politicians have had on Fed decision-making over the past century, based on evolving norms and practices, says Lev Menand with Columbia Law School.
“In the ’50s, ’60s, ’70s, presidents routinely jawboned and pressured Federal Reserve officials to make certain decisions about monetary policy,” said Menand.
Then, after a period of high inflation, followed by a sharp recession that had been spurred by high interest rates in the late ’70s and early ’80s, both parties decided presidents shouldn’t do this.
“And so in the next 45 years until basically the first the Trump term 2016 to 2020 you did not see presidents jawboning,” said Menand.
So why should the system defer to economists above politicians?
“As society and the economy become more complicated, it’s a lot to expect elected officials to have all of that information,” said Irwin Morris of North Carolina State University.
And independent officials won’t feel the pressure political figures would.
“To manipulate the economy in advance of an election for short term economic gains, that brings long term costs,” said Morris.
The Fed is kind of like the chaperone at the party who takes the punch bowl away from the American public and their elected officials trying to have a good time, says Peter Conti-Brown at The Wharton School at the University of Pennsyvlania.
“They like an expanding economy. They like things to be going the way of prosperity. And the Federal Reserve is to make sure that that prosperity is not only here today, but it’s here over the long term, without inflation,” said Conti-Brown.
And an independent Fed does more than keep the U.S. economy on the straight and narrow. Because what happens here, ripples into the global economy.
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