A bipartisan duo of former Federal Reserve chairs, Ben Bernanke and Janet Yellen, issued a dire warning in The New York Times' opinion page, warning against President Donald Trump's assault on the independence of the U.S. central bank.
"Independence for the Federal Reserve to set interest rates does not imply a lack of democratic accountability," they wrote. "Congress has set in law the goals that the Fed must aim to achieve — maximum employment and stable prices — and Fed leaders report regularly to congressional committees on their progress toward those goals.
"Rather, independence means that monetary policymakers are permitted to use fact-based analysis and their best professional judgment in determining how best to reach their mandated goals, without regard to short-term political pressures."
Trump has repeatedly threatened and insulted Chair for the Federal Reserve Jerome Powell, whom he himself initially appointed to the role in his first term, because he wants Powell to cut interest rates more quickly.
Bernanke and Yellen laid out two examples of the catastrophic consequences of presidents meddling in the Federal Reserve's policy.
First, they noted, "during and for some years after World War II, the Fed was pressured by the Treasury to cap interest rates to help finance war debt. That policy led to a burst of double-digit inflation by the late 1940s. Fed policymakers rebelled, and in 1951 the Fed and the Treasury reached an accord to separate government debt management from monetary policy, which in turn freed the Fed to fight inflation."
The second was in 1972, when Richard Nixon jawboned Fed chair Arthur Burns into keeping rates low so the economy would grow quickly going into his re-election. "The result, however, was stagflation — high inflation with weak growth. That experience has haunted central bankers ever since. Stagflation plagued the U.S. economy for years until Paul Volcker, another Fed chair, refocused the bank on reducing inflation in the early 1980s," triggering a massive recession but ultimately stabilizing the dollar.
Powell has said that interest rates would likely be coming down faster if not for upward pressure on prices from Trump's tariffs.
The president has also reportedly considered firing Powell, something he doesn't have the constitutional power to do. He seems to have backed off on this idea for now after urgent lobbying against it by his Treasury secretary.
"The Fed’s credibility — its perceived willingness to make hard decisions based on data and nonpartisan analysis — is an important national asset. It is hard to acquire and easy to lose," Bernanke and Yellen concluded. "In the long run, preserving the Fed’s independence from politics is not about protecting a few individuals or a Washington bureaucracy. It’s about protecting America’s prosperity."
