On Saturday, Kamala Harris was asked to respond to Donald Trump’s suggestion that the president should have a say in the Federal Reserve’s interest rate decisions. She was vehemently opposed, saying, “The Fed is an independent entity, and as president, I would never interfere in the decisions that the Fed makes.”
Fed independence isn’t an issue that resonates with voters; most people probably don’t even understand the distinction between monetary and fiscal policy. But the likelihood that Trump, if he wins, will politicize the Fed looms large in the minds of those who analyze such things. It’s one reason economists surveyed by The Wall Street Journal in July said that inflation would be higher under a second Trump term than under Biden, a conclusion that presumably would carry over to Harris.
But why should the Fed be independent? The Federal Reserve’s legal status is complicated, but there’s no fundamental constitutional principle saying that elected officials must keep their hands off the money supply. Historically, central banks like the Fed have often been treated like ordinary government agencies, and not only under autocratic regimes. For example, the Bank of England was effectively just part of Britain’s Treasury Department until 1997, when it was given operational independence.
At this point, however, most wealthy nations and many with emerging economies have independent central banks and make a point of appointing relatively nonpartisan experts to run them. But why? Why take this particular piece of policy out of the hands of elected officials?
One answer is that you don’t want a Venezuela scenario, in which an irresponsible government relies on the printing press to pay its bills, which can lead to hyperinflation. And don’t say that it can’t happen here; many things we used to consider unthinkable in America are quite thinkable these days.
But even if you leave such extreme scenarios aside, the crucial thing about monetary policy is that of all the levers governments have to affect the economy, it’s the easiest to use — and hence to abuse. And political leaders have found that, as a pragmatic matter, tying their own hands by placing control of the money supply in the hands of quasi-independent technocrats is the best way to protect themselves from temptation.
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