Destroying the Fed's independence to make monetary policy decisions would be a disaster for working people

During the presidential campaign, many people noted that a prospective Trump administration could trigger sustained upward pressure on inflation and interest rates if it tried to violate the Federal Reserve’s independent decision-making. This certainly seems to be happening now, as President Trump has made escalating threats to fire Fed Chair Jerome Powell for the sin of not doing exactly what Trump wants with interest rates. Preventing the political capture of Fed decision-making is the only thing standing in the way of the Trump administration seizing control of monetary policy and fueling higher inflation and interest rates for typical working families.


The Fed’s key job is to maintain macroeconomic stability, which means trying to ensure both unemployment rates and inflation are kept low. Often this involves some short-run trade-offs: There are times when a Fed that wanted unemployment to fall and didn’t care at all about inflation could lower interest rates dramatically. This would incentivize more borrowing and spending in the economy, boosting demand for goods and services. If all this happened with unemployment already relatively low, businesses would find it hard to assemble the inputs (including workers) needed to produce enough to satisfy this new demand—and inflation would follow. Conversely, if the Fed wanted to ensure that inflation remained low and didn’t care much about keeping unemployment low, it could keep interest rates high and tolerate too-high unemployment for extended periods to ensure demand never came close to outrunning the economy’s supply side.

The Fed has extraordinary levels of independence in making decisions about these trade-offs. They haven’t always gotten it right. I’d argue that for decades after the 1970s they acted like the caricature I drew above: They tolerated excess rates of unemployment in order to avoid any risk of rising inflation. This toleration of slack labor markets was a key driver of wage suppression in those decades.

For most of the 21st century, however, the Fed has placed an appropriately higher weight of importance on keeping unemployment low. They are an institution that is not rigid on macroeconomic management, and they react and change course relatively quickly when the evidence warrants it. These are incredibly valuable attributes for such an important economic policymaking institution in the U.S.—degrading their value by allowing a president to bully or micromanage the Fed’s decision-making would be a disaster for the U.S. economy, including typical workers and their families.

https://www.epi.org/blog/destroying-the-feds-independence-to-make-monetary-policy-decisions-would-be-a-disaster-for-working-people/