One of the cornerstones of the separation of powers in the US is the independence of the Federal Reserve, which is tasked with making challenging economic decisions without political interference.
Independent (LON:IOG) institution
The Fed was established more than 70 years ago and since that time its role in managing monetary policy has been insulated from political influence, an arrangement designed to prioritise long-term economic stability over short-term popularity for politicians.
Independent central banks, like the Fed, typically help mitigate inflation risks, an advantage often credited to their ability to operate without external pressure.
With the ascendancy of President-elect Donald Trump, the norm of the independence of the Fed is one of many things that could be thrown out, if his recent remarks are to be believed.
During a press conference in August, Trump expressed the view that the president should have input on the Fed’s interest rate decisions, citing his supposed financial acumen and past business successes as indicators of sound judgment.
It remains unclear whether a president has the authority to directly alter the Fed’s independence without the support of Congress but it now seems likely that Trump will have a sympathetic Senate if not House of Representatives cheering on any alterations he is likely to make to economic policy.
Political pressure on the bank
Trump’s comments have, unsurprisingly, drawn criticism from those concerned about potential political pressure on the central bank.
The Federal Reserve’s autonomy has historically allowed it to implement policies, such as maintaining high interest rates to control inflation, that may be unpopular yet are deemed necessary for the economy’s health.
Despite persistent calls for lower rates, the Fed sustained rates at a 20-year peak to address inflation, which only recently fell close to the 2% target after a year of elevated levels.
The need for central banks to be independent, as Federal Reserve chair Jerome Powell highlighted in comments he made in September, stems from the imperative for them to foster stable and predictable economic policies.
Countries with autonomous central banks frequently experience lower inflation, a trend evident in the United States over the decades.
Powell's position is clear – the structure of an independent Fed has been “good for the public” and his hope is that the arrangement will endure. It remains to be seen whether Trump will listen to experts in their fields, such as Powell.