How Long Can the Fed’s Independence Last?
By Joe Nocera
As the Federal Reserve board was meeting on Tuesday to make its latest decision about interest rates—amid President Donald Trump’s continuing agitation for them to be lowered—I got on the phone with several of Fed chairman Jerome Powell’s most cogent critics. Critics like Karen Petrou, the highly respected cofounder of the bank advisory firm Federal Financial Analytics, who has long argued that the policies of Powell and his predecessors, Janet Yellen and Ben Bernanke, dramatically increased income inequality. Critics like Mohamed El-Erian, the well-known economist, former CEO of bond investing giant Pimco, and now president of Queens’ College, Cambridge, who warned before just about anyone that Powell was sowing the seeds of inflation by keeping interest rates too low early in his tenure. Critics like Christopher Leonard, whose book The Lords of Easy Money makes the case that the huge bond-buying program begun by Bernanke to get the U.S. through the financial crisis—and inexplicably continued by Powell after the crisis was long over—was little more than a gift to Wall Street that did nothing for the rest of us. In other words, they each believe Powell, as Fed chairman, has made multiple mistakes that have cost the United States a great deal. “If he was the CEO of a company, his performance would have gotten him fired,” El-Erian told me. Yet when I asked each of Powell’s critics if Donald Trump should be able to fire him before his term expires next year and replace him with someone who will carry out Trump’s wishes, they had the same answer: no.They all said that Fed independence was critically important because the world’s most vital central bank has to be able to make interest-rate decisions without interference from the body politic. “If monetary policy is left in the hands of the politicians, there is a tremendous incentive to do the wrong thing,” said Leonard. Petrou put it more directly. “Politicians are short-term thinkers and almost always care only about themselves,” she told me.Politicians, you see, are always going to want to lower short-term interest rates, knowing that doing so will goose the economy. But if interest rates remain too low for too long, it can give rise to inflation, which wreaks economic havoc, and which the Fed is mandated by law to keep under control. So there are times when the Fed has to raise rates, even though it puts a crimp on economic activity, to cut off inflation at that pass. Even if it makes the president, in this case Donald Trump, really mad.