When people talk about 'Fed independence' or 'the importance of independent central banks,' I think there's often some vagueness about what we're actually talking about. So I want to take a second to talk through how at least I think about the concept.
To my mind, the main goal here is to have a central bank that's capable of thinking on cycles that are distinct from the electoral cycle. A primary goal of most elected officials is to win re-election. And that might manifest as an impulse to cut taxes to boost the economy before an election, even when inflation is already high. Or that impulse might show up as an impulse to vote against fiscal stimulus, when you're in the opposition, so as to deny your opponent in the White House the opportunity to run on a good economy.
This is all more or less intuitive, but what's also intuitive is that macro management for the electoral cycle is probably not what's optimal for the economy. As such, economists like the idea of a monetary authority having some independence in how it operates and pursues its mandate.
But here's the thing, that mandate comes from Congress. A thing you often read is that the Fed is a 'creature of Congress' (here's a recent article form the
Federalist Society), and if Congress wanted to it could abolish the Fed, or change its mandate, or whatever. But it's not like the Fed is some quasi-public, quasi-private fourth branch of the US government that is on equal footing with the executive, legislative, and judicial branches. No, the Fed gets its mandates from Congress, and the Fed Chair testifies in front of both houses of Congress twice a year.
One reason this structurally makes a lot of sense is that it's Congress that has been given the
constitutional 'power of the purse.' Generally speaking when we think about the power of the purse, we're thinking about taxing and spending. But also there's no reason that lending can't be understood under the same general concept. And furthermore, especially since 2008 and 2020, the Fed has engaged in activities that are fiscal-ish, especially whenever its played a role in backstopping private assets in some way.
Yesterday on the podcast we interviewed Columbia Law Professor Lev Menand about
Trump's attempt to fire Fed Governor Lisa Cook. Now you don't have to have an opinion on the merits or legality of Trump's efforts here, because you know that Trump's goal is to basically assemble a coalition of
his people at the Fed.
Four days ago,
he specifically posted on Truth Social about the Trump people and the Biden people at the FOMC. He sees them on partisan teams. In fact yesterday, he referred to the fact that he would shortly have a "majority" on the Fed. What does that mean? This isn't a mystery. He wants to establish a team of his players.
Again, you don't have to have any opinion on the validity of the allegations against Lisa Cook or the degree to which she's being targeted "for cause." What matters is that Trump is talking about his side establishing a majority at the central bank.
Of course it is true that any president is going to nominate individuals with whom they are at least somewhat aligned. And it's also true that Trump is not the first president that has put pressure on the Fed to act in some way. That's all true. The new part is the explicit idea of pursuing a team of his people.
Who are Trump's people? Well my co-host Tracy Alloway
tweeted some great nuggets from his cabinet meeting yesterday. Here is what Steven Witkoff said: "... There's only one thing I wish for, that the Nobel committee finally gets its act together and realizes that you are the single finest candidate since the Nobel Peace, this Noble award was ever talked about."
Here is what
Howard Lutnick said: "The Department of Commerce is going to start issuing its statistics on the blockchain, because you are the crypto president. And we are going to put out GDP on the blockchain so people can use the blockchain for data distribution."
There's an obsequiousness to it. The risk is that a critical mass of governors is established (a majority, if you will) that is less focused on achieving the dual mandate and more focused on serving the president's agenda. Furthermore,
according to our colleague Saleha Mohsin, the White House is examining ways to grab power away from the regional Fed banks. As she notes, a majority of governors (under existing rules)
can block re-appointment of regional Fed presidents perceived to be offside the White House's agenda.
And so again, this was a real lightbulb that went off in my head after talking to Lev. It's not so much about the Fed going from independent to not independent. In the first instance, the possibility is that the Fed moves from being accountable to Congress to accountable to the White House. And then two things follow from that. One possibility is that policy setting becomes more attuned to the electoral cycle. And then the other possibility is that because the Fed can theoretically engage in quasi-fiscal activities, it becomes a vehicle for the executive to do an end run around Congress, when the votes aren't there for this or that White House priority. As such, the power of the purse moves to the executive branch.
One more thing here. Someone will inevitably respond and say, "But Joe, it's already obvious that the Fed sets monetary policy in a partisan way. That ship sailed a long time ago."
For what it's worth, I don't think that's so obvious at all. It's
true that the Fed cut 50 basis points last September, which some people I suppose presumed would be beneficial for Kamala Harris's campaign. But it's important to remember that the labor market looked like it had weakened considerably that summer, and at the time inflation was still on its glide downward. Furthermore, the Fed cut rates again after Trump had already won the election
in early November. And then the
Fed cut yet again in December (I'd actually forgotten about that one, until I looked it up just now). If you think the Fed was being partisan by cutting last September, why would it follow through with further cuts after the election's outcome?
It's also worth remembering that in 2022,
there was a lot of criticism from the left that the Fed was undermining Biden's economy by hiking rates too fast.
Interestingly enough, I can really only think of one time in recent memory where it seemed like the Fed may have really had an effect on a presidential campaign. In December 2015, less than a year before the election,
Janet Yellen hiked rates for the first time since the financial crisis. It was after this rate hike that we got what some people call the
manufacturing recession of 2016. And then arguably the sharp downturn in manufacturing is what flipped Wisconsin, Michigan, and Pennsylvania from blue to red that year.
Can we prove that Yellen's 2015 rate hike handed Trump the presidency? I mean, probably not. But in terms of a story you can tell about Fed policy actually making a difference in an election, this is probably the most compelling recent example, where a Democratic appointee may have helped usher in a Republican administration.
- - - Joe Wiesenthal, Bloomberg, August 27th, 2025
