Four former Federal Reserve leaders are stressing the importance of an independent central bank in maintaining economic stability as President Trump attempts to influence its current chief through barbed public statements and Twitter posts.
In a Wall Street Journal op-ed, Janet Yellen, Ben Bernanke, Alan Greenspan, and Paul Volcker stressed that the economic interests of Americans are better served when the Federal Reserve is insulated from political pressure and “relies solely on sound economic principles and data.”
Basing monetary policy on political whims, they warned, can have damaging consequences such as higher inflation and slower growth.
“We are united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons,” the four, who were appointed by Republican and Democratic presidents and hold a combined tenure stretching to the 1970s, wrote in the op-ed.
“Even the perception that monetary-policy decisions are politically motivated, or influenced by the threats that policymakers won’t be able to serve out their terms of office, can undermine public confidence that the central bank is acting in the best interest of the economy,” the former Fed leaders said. “That can lead to unstable financial markets and worse economic outcomes.”
Their comments follow months of pressure from Trump, who has accused the Fed and Powell — his hand-picked choice to succeed Yellen — of holding back economic growth by raising interest rates. The Fed raised rates four times in 2018, and Trump suggested last month he was open to firing Powell though lawmakers and his own staff have told him he lacks the power to do so.
Congress established the bank as an independent agency with safeguards to protect it from political manipulation because it recognized the importance of nonpartisan, independent monetary policy, the former Fed leaders wrote. Congress also provides oversight of the bank, ensuring it does not escape accountability, they wrote.
“Research has shown that monetary policy based on the political (rather than economic) needs of the moment leads to worse economic performance in the long run,” the four wrote.
The Fed last week lowered interest rates for the first time since the 2008 financial crisis in a win for the president. The move was largely viewed as an effort to preserve economic growth amid the president’s ongoing trade war with China and Great Britain’s exit from the European Union.
