But people forget just how new the idea of central-bank independence really is. The venerable Bank of England
gained monetary independence only 20 years ago. Back in the early 1980s, when I wrote an academic paper making the case for independence as a tool to establish central banks’ anti-inflation credibility, one journal after another rejected it. The referees scoffed at the idea that independence could be more than a meaningless façade, easily pierced by the government.
Illustration by Binay Sinha
Which brings us back to Mr Trump. Is he just pausing long and hard before pressing the Fed to stoke the economy ahead of the 2020 election, and ultimately to monetise the massive deficits wrought by Republican tax cuts? If that is his plan — and who really believes a cornered Mr Trump would not resort to high inflation? — the good news is that his Fed appointments will not make his life easy.
Mr Trump does appear to understand this. After all, on the campaign trail in 2016, he himself railed against Powell’s predecessor, Janet Yellen, for allegedly holding down interest rates to facilitate Hillary Clinton’s election. Now as president, that is exactly what he would like to see in 2020. Interviewing candidates to succeed Yellen last year, he supposedly asked just one key question: “You aren’t going to raise interest rates and ruin my beautiful stock market, are you?”
True, Mr Trump is somewhat constrained by the need to win Senate approval of his nominations. In fact, some conservative Republicans have objected to another of his appointments, Marvin Goodfriend of Carnegie Mellon University, for daring to suggest that the Fed might need a new approach to monetary policy (negative interest rates) to confront the next very deep recession or financial crisis. And although someday the Fed will almost surely embrace this advice (I have also published on the issue), Mr Goodfriend’s nomination barely survived the US Senate Banking Committee. But, by and large, the Senate has given Mr Trump what he wants, and many Republicans would have embraced a disrupter — for example, a disciple of Ron “End the Fed” Paul — or another conservative preaching a return to the pre-World War I gold standard.
Unfortunately, the battle for the Fed’s independence is far from over. Mr Trump may just be keeping his powder dry until a real conflict erupts. Right now, the Fed’s planned interest-rate hikes are largely prophylactic. Inflation is rising only very slowly, even as the economy seems to be running red-hot. But the moment of reckoning could still come. And, assuming that Mr Trump stays healthy, avoids impeachment, and runs again, the last thing he would want in 2019 and 2020 is sharply higher interest rates, an untimely rise in unemployment, and a likely price collapse in his beautiful stock market.
In a crunch, the Fed’s much-vaunted independence could prove more fragile than most people realise. It is not enshrined in the US Constitution, and the president and Congress maintain several levers of control. An act of Congress created the Fed in 1913, and in principle Congress could revamp it, say, by greatly increasing congressional oversight, or by starving it of funding. Indeed, from time to time bills have floated around Congress that would have done just that.
For now, Fed appointees have been treated almost as well as generals in Mr Trump’s universe. True, with ballooning deficits and the approach of the 2020 election campaign, testing times lie ahead. But for now, let’s acknowledge that this is one area where the Trump presidency has been almost normal – so far.
The writer is a former chief economist of the IMF, is Professor of Economics and Public Policy at Harvard University
©Project Syndicate, 2018