Opinion Amid uncertainty, the US Fed holds the fort. Don’t breach it
The challenge the world over is to ensure that monetary policy does not become subservient to the executive and subject to the whims and fancies of political leaders. Independence of central banks is a much-valued asset
In this age of uncertainty, there is strong logic in ensuring the independence of institutions such as central banks. In an extraordinary development, the US Department of Justice has served the US Federal Reserve “with grand jury subpoenas, threatening a criminal indictment” in relation to Fed chairman Jerome Powell’s “testimony before the Senate Banking Committee last June”. While the testimony was regarding the renovation of the Fed’s office buildings, Powell has sought to frame the Justice Department’s move purely in political terms that threaten to undermine the central bank’s independence and autonomy. Pledging to continue doing his job, Powell said that these threats are due to the Fed setting interest rates on the basis of its own assessment, “rather than following the preferences of the President”. Unfortunately, this confrontation between the central bank and the executive branch isn’t a one-off.
In his second term, US President Donald Trump has been extremely critical of the Federal Reserve and its chairman. Last year, Trump had posted on X that “Jay Powell and the Fed failed to stop the problem they created with inflation”. In another instance, Trump, who has also tried to fire Fed Governor Lisa Cook, had said, “We have a stupid person at the Fed. He probably won’t cut today. Europe had 10 cuts, and we had none. I guess he’s a political guy.” Markets were quick to react to the latest attack on the Fed — the US dollar fell in early trading — underlining concerns over attacks on the central bank. Some reports suggest that a “sell America” sentiment is gaining traction — political interference in the Fed’s work will only undermine investor confidence.
In this age of uncertainty, there is strong logic in ensuring the independence of institutions such as central banks. The political class, driven more by short-term imperatives, will tend to veer towards looser monetary policy to push up growth, sidestepping concerns over inflation. In contrast, central banks, which are not in a “popularity contest”, can take uncomfortable decisions. The challenge the world over is to ensure that monetary policy does not become subject to the whims and fancies of political leaders. Independence of central banks is a much-valued asset.
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