Katharina Pistor, Professor of Comparative Law at Columbia, wrote a really good book, Code of Capital, about the history of laws written to suit capital and the rich going all the way back to the origins of Limited Liability Companies (LLCs) in England in the middle ages. She offers a historical take on the independence of the Fed question:
"If central banks don’t serve the people but are more beholden to finance, what can be done? Destroying central-bank independence is not a good idea, because it is more likely to cause another crisis than to solve the underlying problem. But this does not mean that we should preserve the existing system instead of seeking a new monetary settlement. It is high time to rethink how money should be managed in ways that benefit the people and how to ensure that whoever is tasked with this role is not captured by finance."
Pistor @ Project Syndicate
Claudia Sahm, Economist, Fed insider and credible big booster for the "independence" of the Fed:
"Independent technocrats, not political operatives, setting interest rates is widely viewed as crucial for controlling inflation. Throughout history and around the world, there are examples of politicians advocating for lower interest rates to stimulate economic growth or reduce the government's borrowing costs. Such policies can increase demand beyond the economy’s productive capacity, leading to inflation. An independent central bank offers a bulwark to those political tendencies."
Matt Stoller, Anti-Monopoly advocate and author of the great muckraking history, Goliath: The 100-Year War Between Monopoly Power and Democracy, begs to differ:
"It was only in the late 1970s, when Jimmy Carter picked Paul Volcker to promote a strong dollar abroad, that Wall Street developed modern thinking around “independence.” The idea was to kill this populist sentiment ["union power"/living wages], which was successful. Fed independence, along with the consumer welfare standard, cost/benefit analysis, and deficit-based fiscal analysis, structures neoliberalism."
Mike Konczal, Economist, wrote Freedom from the Market, more sympathetic to labor and/or political claims than most economists, makes an additional case for an independent Fed:
"No administration, and especially not the Trump administration, is eager to announce, "We need to cut rates because the labor market is weakening on our watch." Politically, that's a tough headline. Independent Fed officials, however, can cite labor market weakness to justify rate cuts in ways that communicate clearly to financial markets without political baggage.
It isn’t the most dramatic rationale for central bank independence.... But it is a feature. Losing transparency about what truly informs policy decisions is another potential cost of increased White House influence over Fed policy."
Krugman, Economist, journalist, he who breaks down the wonky side of economics as well as anybody, weighs in on the independent Fed question with some history and opposition to Trump's power grab:
"The important thing for the rest of us to understand is that while there are legitimate arguments for (but also against) modest rate cuts later this year, there is no reasonable case for the mega cuts Trump is demanding.
Which does not, unfortunately, mean that he won’t eventually bully the Fed into giving him what he wants."
My theoretical sympathies lay with the historians and populist protesters. The Fed is rigged for Wall Street and against labor and taxing the rich. Always has been. There has to be a better way.
But the prospect of Grump at the helm of the Fed is unnerving, and triggers my residual Econ 101 conservatism. What can I say: it sounds correct and plausible to me that a careful, deliberate, predictable approach to Fed monetary policy encourages business planning and growth. And, by contrast, impulsive, self-serving, unpredictable monetary policy, like Trump's tariff wars, would make business planning and growth more difficult. How big a difference this would make I don't know but steady as she goes goldilocks growth is over half the battle with monetary policy, as far as I can tell. And as we all know steady as she goes is anathema to Trump's melodramatic performative spectacle politics.
The Fed needs reform but does not deserve the destruction Trump brings to everything he touches.
But my guess would be markets are pulling for Trump, he lacks discretion but is neoliberal to the bone like them. They like tax cuts for the rich and cost-cutting austerity politics for everybody else. But Tariffs and forced deportations, especially the way Grump is going about them, do appear to be wildly inflationary and deflationary at the same time, stagflationary, which most business people know can't be good for business in the long run.
The word is Trump wants to lower interest rates, which would make it easier for regular people to buy cars and homes and would presumably be quite popular. Economist Ha-Joon Chang argues much higher inflation than the Fed target of 2% encourages higher growth rates but higher prices hit workers and the bottom half first and hardest and governments, especially ones like this one, are slow, if not condescendingly opposed, to helping workers and consumers keep pace with an inflationary economy.
Krugman contends cutting interest rates by 3%, as Trump has bragged in the press he would do, would be wildly inflationary. But the bigger risk with Trump, I think, is he yanks rates up and down as market swings fail to deliver the results he wants.
