The Federal Reserve must maintain its independence for the U.S. economy to thrive

President Donald Trump is attempting to fire Federal Reserve Board Governor Lisa Cook, the first Black woman to serve in that role. He probably lacks the legal authority to do so, but that is for the courts to decide. Regardless, this unprecedented move by a U.S. president directly threatens the Fed’s independence—and therefore the stability of the U.S. economy.

We take central bank independence as a given, but it was not always that way. Until the end of the 1980s, central bank independence was the rare exception—mostly in Switzerland, (West) Germany, and the United States—not the rule. But since then, it has come to dominate both thinking and practice around the world.

There have been attacks on central bank independence before, both in the United States and in other countries, and the resulting economic pain was often severe. In this country, perhaps the most egregious example of the Federal Reserve doing the bidding of politicians came in the lead up to the 1972 presidential election, when then-President Richard Nixon and Federal Reserve Chairman Arthur Burns coordinated to expand both fiscal and monetary policy in tandem to boost the economy and thereby President Nixon’s reelection chances. It worked politically. But to contain the inflationary pressures these actions unleashed, the president was compelled in 1971 to put in place the only peacetime wage-price controls in U.S. history. They were a disaster.

It is unfair to blame Burns and his colleagues on the Fed for the entire extraordinary inflation that followed. Supply shocks, especially from food and energy, were important determinants of inflation starting in 1972. Ironically, the U.S. economy is now similarly facing several potential supply shocks—from tariffs, from the potential for current deportation policy to disrupt U.S. labor supply, and even from the possibility that the wars in Ukraine and the Middle East could affect oil prices.

Monetary policy is the primary policy tool for fighting inflation. While fiscal policy can boost demand, it has less ability to curb inflation—and is virtually never used for that purpose. What will happen if we face serious inflation, and the Federal Reserve does not respond with tighter monetary policy?

Again, we should look to the past for insight. Years after the unwise and coordinated expansionary fiscal and monetary policy mix of the early 1970s, the notable and strong-willed inflation hawk Paul Volcker was put in charge of the Fed and took to fighting inflation with high interest rates. The price of taming inflation was the twin recessions of 1980 and 1981–82, caused significantly by tight money and credit. Volcker’s policies worked and restored the Fed’s anti-inflation credibility. But the pain was palpable.

The supply shocks of the 1970s and 1980s, of course, were global. So were the recessions that followed. Today’s supply shocks in the United States—from tariffs and shrinkage of the labor force—are, by contrast, mostly homemade. If President Trump succeeds in his campaign to eviscerate the Fed, our main bulwark against inflation will be weakened, if not destroyed.

Former Fed Chair Ben Bernanke summed up the danger of a politicized Fed succinctly in a 2010 speech:

Policymakers in a central bank subject to short-term political influence may face pressures to overstimulate the economy to achieve short-term output and employment gains that exceed the economy’s underlying potential. Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind only inflationary pressures that worsen the economy’s longer-term prospects. Thus, political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.

The Federal Reserve’s Open Market Committee is technocratic, not political. The seven governors are appointed by the usual political appointee process: nominated by the president and confirmed by the U.S. Senate. But they are expected to check their politics at the door—and they generally do. The 12 regional Reserve Bank presidents are not politically appointed.

These technocrats base their interest rate decisions on data, theory, and lessons from history, not on political calculations. That does not mean they never err. But it does mean that the Fed’s errors are not designed to help the party in power—which would generally mean setting lower interest rates no matter what. President Trump, for example, has been clamoring for a 1 percent federal funds rate for years, though markets do not believe that will happen. If they did, expected inflation, and hence interest rates, would be much higher right now.

If Congress and/or the courts do not stop the president from eviscerating the Fed’s independence, it stands to put the U.S. economy at risk of a 21st century version of the 1970s and ‘80s, with high inflation, high unemployment, and stagnant economic growth—a true recipe for economic disaster.

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