A few remarks on Fed independence
Trump has made various sallies against the idea of an independent Fed, including lots of rhetoric, firing Lisa Cook, aiming to have a CEA chair on the Fed board, and more. Probably the list is longer than I realize.
To be clear, I see no upside to these moves and I do not favor them. That said, I am not surprised that markets are not freaking out.
People, the Fed was never that independent to begin with!
Come 2008, the Fed, Treasury, and other parties sat down and worked out a strategy for dealing with the financial crisis. The Fed has a big voice in those decisions, but ultimately has to go along with the general agreement.
Circa, 2020-2021, with the pandemic, the same kind of procedure applied.
You may or may not like the particular decisions that were made (too little inflation the first time, too much inflation the second time), but I don’t think there is a very different way to proceed in those situations.
And given recent budgeting decisions, fiscal dominance may lie in our future in any case. The Fed is not immune from those pressures.
The Fed is most “independent” when the stakes are low and most people are happy with (more or less) two percent inflation. That is also when the independence matters least.
The real problem comes when the quality of governance is low. Then encroaching on central bank independence simply raises the level of stupidity. Some of that is happening right now.
A non-independent central bank can work just fine when the quality of government is sufficiently high. New Zealand has had a non-independent central bank since the Reserve Bank Act of 1989 (before that it had a non-independent central bank in a different and worse way). There is operational independence, but an inflation target is set in conjunction with the government. You may or may not favor this approach, but it has not been a disaster and it helped to lower Kiwi inflation rates significantly and with political cover.
Way back when, Milton Friedman used to argue periodically that Congress should set the rate of price inflation and take responsibility for it. I think that is a bad idea, especially today, but it should cure you of the notion that “independence” is sacrosanct. Every system has some means of accountability built in, and indeed has to.
I know all those scatter plot graphs that correlate central bank independence with lower inflation rates. In my view, if you could insert a true “quality of government” extra variable, the correlation mostly vanishes. Plus I do not trust the measures of independence that are used.
As Gandhi once said — “Central bank independence, it would be a good idea!”
Addendum: I also find it a little strange that many critics of the Trump actions earlier had been calling for higher inflation targets, say three or even four percent. That is maybe not an outright contradiction, but…the Fed isn’t just going to move to that on its own, right? Central bank independence for thee but not for me?