The Fed was politicized long before Donald Trump got to the White House or even started tweeting.
What to make of the current battle over the politicization of the Federal Reserve? The past year has featured an unprecedented attack by President Trump on Fed leaders and their independence. Mr. Trump not only questioned the board governors’ judgment but even contemplated removing the chairman for the sin of not setting interest rates where the president wants them. In reaction, four past Fed chairmen recently co-wrote an op-ed on these pages to remind the country that short-term political pressures can undermine the proper long-term objectives of monetary policy.
Yet it’s ironic to witness former Fed chairmen lamenting the central bank’s politicization. Over the past few decades the Fed has become increasingly politicized in large part because of the actions of its leaders, including the op-ed’s four authors. It is worth reflecting on how an institution like the Fed becomes politicized, and what can be done today to promote Fed independence.
Milton Friedman, Allan Meltzer and many other observers of Fed history recognized that independence is more than a matter of legal and institutional structure; it depends on how the Fed behaves. Under the Fed’s current structure and rules, there are many levers that politicians can, and do, employ to influence monetary policy. True independence comes from making it harder for politicians to pull those levers.
Charles W. Calomiris is a professor of finance at Columbia Business School and a member of the Shadow Open Market Committee.
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