This is an expanded version of my 300th commentary over WAMC-FM (My first one aired back in 2005).In this version I revisit an issue that I introduced in one of my very first presentations --- the independence of the U.S. Central Bank, the Federal Reserve System or Fed for short. The issue of Fed independence is much in the news today because of President Trump’s flirtations with the idea of firing Fed Chairman Jerome Powell and his actual attempt to fire Lisa Cook from the Board of Governors – a move currently blocked by the Courts. These actions by Trump have produced an almost unanimous chorus of opposition based on the importance, according to the various speakers, of Fed independence.
For example, on January 21, Governor Lisa Cook’s case was argued before the Supreme Court. The New York Times reported that it appeared that Justices from across the ideological spectrum were concerned that Trump’s effort to fire her would undermine Fed independence.Cook herself issued a statement that read in part: “[Will] the Federal Reserve … set key interest rates guided by evidence and independent judgment or will (it) succumb to political pressure. Research and experience show that Federal Reserve independence is essential to fulfilling the congressional mandate of price stability and maximum employment, …. That is why Congress chose to insulate the Federal Reserve from political threats, while holding it accountable for delivering on that mandate. For as long as I serve at the Federal Reserve, I will uphold the principle of political independence in service to the American people.”[quoted in https://www.nytimes.com/live/2026/01/21/us/supreme-court-fed-lisa-cook?campaign_id=60&emc=edit_na_20260121&instance_id=169627&nl=breaking-news®i_id=59542766&segment_id=214013&user_id=e34224fbe0b7ae7eac485434278fa4fe]
Before I get to the issue of Fed independence, I should probably say a little bit about what it actually is and what it does. Our Central Bank, the Federal Reserve System was created in 1914 in response to a particularly scary financial panic in 1907. In the course of the 19th Century and up to the creation of the Federal Reserve System the U.S. suffered from periodic banking panics where people would rush to a bank to withdraw their savings. Since banks earned their interest income by lending out the money that people deposited in the bank, at any given time, there was very little of the depositors’ money sitting in the bank – most of it had been lent out.When enough depositors lose confidence in the bank and come charging in to get their money, banks are in danger of having to go bankrupt because they didn’t have enough cash on hand to satisfy the panicky depositors.
The creation of a Central Bank is one solution to this problem --- the Central Bank can act as a lender of last resort to make sure banks have enough liquidity to meet such surges of withdrawals. The Fed consisted of 12 Regional Federal Reserve Banks and a central Board of Governors appointed by the President. In the original structure, the regional banks had significant independence.In addition, the Secretary of Treasury was an ex officio member of the Board.
Unfortunately, the Fed failed miserably during the first phase of the Great Depression (1919-1933) and so there were significant reforms made. One of the reforms was to increase the role of the Board of Governors --- making the 12 Regional Federal Reserve Banks subservient to decisions by the Board. Another was the Secretary of Treasury was removed from the Board, solidifying the independence of the FED from the federal government. Third, the 12-member Federal Open Market Committee (FOMC) was created, consisting of the seven Board members and five of the regional banks’ Presidents. The FOMC was given the job of buying and selling government securities. By those actions, the Fed was able to manipulate interest rates --- and that manipulation has become the major tool by which the Fed engages in monetary policy.
[For details of how the FED was changed by the Great Depression, there is no better source than William Grieder’s Secrets of The Temple. For a general short discussion on the Fed and monetary policy, see Sherman, Meeropol and Sherman, Principles of Macroeconomics:Activist vs. Auisterity Policies, 2nd edition, Routledge (2019):Chapter 22.]
Okay – well now that I’ve briefly explained what the Fed is and a bit about what it does, what does Fed independence actually mean?There are three aspects of the Fed’s independence.First of all, it has its own source of financing (it generates income by owning interest-bearing notes). Therefore, it does not have to rely on Congress for appropriations. Second, the seven members of the Federal Reserve Board are appointed for 14-year terms which pretty much insulates them from short run complaints by Presidents or members of Congress. (The President appoints them and the Senate has to confirm them but once they are on the Board, they are completely free of pressure because of the length of their terms! The President does get to appoint a new chair of the board every four years but as Trump’s complaints about Chairman Powell indicate, once appointed chair, the individual involved remains independent as well – and former chairs stay on the board for their entire 14-year term if they wish.). In addition, the chair has only one of seven votes on the Board of Governors and one of 12 votes on the FOMC.
Third, though Congress could pass a law mandating that the FED engage in specific policies (say pegging interest rates below one percent) in practice that has never occurred.Instead, Congress mandates certain general goals for the Fed. Right now, the Fed has to report to Congress regularly about how it is carrying out its “dual mandate” – low inflation and high employment. In 1978, the Humphrey-Hawkins Full Employment and Balanced Growth Act was passed and signed into law. Originally that law attempted to mandate quantitative goals -- the unemployment rate should be 4 % and the inflation rate should be 3 %.In practice, the Fed has recently adopted a goal of 2 %t inflation and has completely ignored the 4 % target for unemployment from the original law. Since 1978, the rate of unemployment has been 4 % or lower in just six of the past 47 years. Currently, Fed policy is to reach a level of unemployment that is not so low that it generates a rate of inflation above the 2 % goal.Recently, the unemployment goal has been in the 4 to 5 % range.
What is the actual extent of Fed independence (and this actually applies to most Central Banks in the advanced countries of the world) and how does it manifest itself? I quote from a recent on-line piece from the Brookings Institution:
“Elected governments set the central bank’s mandate, but the central banks have the freedom to deploy their tools (primarily interest rates) to achieve that mandate. The rationale is that elected politicians will tend to favor lower interest rates now to boost the economy, but this comes at the expense of more inflation later, and that’s not in the best interests of the overall economy. Independent central bankers, the argument goes, can make unpopular decisions, such as raising interest rates, when circumstances demand. Academic research supports the case that economies with independent central banks tend to have lower—and less volatile—inflation rates.”
[David Wessell, “Why is the Federal Reserve independent, and what does that mean in practice?” Brookings Commentary, December 12, 2025, available at https://www.brookings.edu/articles/why-is-the-federal-reserve-independent-and-what-does-that-mean-in-practice/]
By the way, the assertion that lowering interest rates to boost the economy “comes at the expense of more inflation later” is hotly contested by many economists (including me). In the middle of the great recession (2010-2019) interest rates had been cut to virtually zero without the slightest impact on inflation. For details, see interest rates and inflation rates between 2009 and 2020.
[https://fred.stlouisfed.org/series/FEDFUNDS – from 2009 to 2015, the rate was zero and inflation never went above 3 percent for the entire period of recovery ending in 2019.For that see https://fred.stlouisfed.org/series/FPCPITOTLZGUSA]
Sometimes such a policy produces an increase in inflation but not always. The policy that produced the most damage to the Fed’s credibility was when President Richard Nixon convinced Fed Chairman Arthur Burns to adopt a low interest rate policy in 1972. The next year inflation exploded and though the main cause was the 1973 oil embargo and subsequent spike in oil prices, Fed policy was also blamed.
However, if one considers the way the FOMC has manipulated interest rates in the years since World War II, there have been many periods when the Fed has raised interest rates to slow down perceived inflation only to cause a recession. There have also been times when in the midst of a period of high unemployment, the Fed has moved very slowly to lower rates, thereby prolonging the period of high unemployment.
[The best detailed analysis of this behavior by the Fed is from a book by Dean Baker:The Conservative Nanny State:How the Wealthy Use the Government to Stay Rich and Get Richer.Chapter 2 describes the Fed’s penchant for interest rate increases to forestall predicted inflation at the sacrifice of jobs and wage increases.It is entitled “The workers are getting uppity, call out the FED.”
Today, however, the fear that Trump’s bullying of the Fed will cause too deep a cut in interest rates, and that such a cut might trigger inflation (a fear that exists anyway because of Trump’s tariffs!) is the key to understanding why the business community and many politicians have freaked out. This became an even stronger complaint when it became known that the Trump’s Justice Department was launching a criminal investigation of Powell.
Here, I want to briefly play skunk at the picnic.I do think that putting monetary policy decisions (interest rates, etc.) in the hands of the President would be very dangerous. I also think making the Fed independent of Congress (though remember, Congress can always pass a law giving the Fed “marching orders,”) is probably a good thing. Nevertheless, I do not believe the Fed actually is independent. Yes, it is independent of the President and Congress, but it is not independent of the financial sector of the business community. The Presidents of the 12 regional Federal Reserve Banks are selected by local boards of directors. Two-thirds of the people on those boards represent the member banks in the region. The most important institution of the Federal Reserve is the FOMC which makes month to month, year to year, monetary policy decisions about interest rates. At any given time, there are five presidents of member banks on the FOMC along with the seven Governors appointed by the President.In my opinion, this gives an important “tilt” to Fed decision making which is one of the reasons the Fed has been much better over time at fighting inflation than in making sure unemployment stays low (recall that the 4 % unemployment rate goal has been reached the grand total of six times in the last 47 years).This of course is the source of the title of Baker’s Chapter 2 in the book mentioned above.
In addition, it is not as if the members of the Board of Governors are alien to the financial sector of the economy.Yes, there have been well known economists --Alan Greenspan, Ben Bernanke and Janet Yellen -- who have been chairs of the Fed but consider the current seven members of the Board. Three out of the seven current governors come right out of the financial sector. Chairman Powell, himself, is a lawyer and former investment banker. Vice Chair for Supervision Michelle Bowman is a former banker. Governor Stephen Miran is a former finance professional.Three others are monetary research economists. Only Lisa Cook, the governor Trump is trying to fire, can clearly be seen as representing the community at large due to her extensive research into racial disparities and labor markets.
To make the Fed more responsive to the public rather than the financial sector, I believe the method of selecting the regional bank presidents needs to change. I would recommend changing the composition of the regional banks’ Boards of Directors by making sure all of them are representatives of the public at large rather than the financial sector. The Fed regulates the financial sector – it should not be in its hip pocket. In the most recent experience of a financial crisis which was caused in large part by the housing bubble and led to the Great Recession of 2008-2009, the Fed failed miserably to interfere with the expansion of that bubble and the virtually criminal behavior of the shadow banking sector. Then, the Fed (with Congress’ support and the acquiescence of both Presidents George W. Bush and Barack Obama) bailed out the banks while leaving many homeowners under water in terms of their mortgage payments. A more democratically controlled Fed might have made sure homeowners got bailed out and that bankers had to suffer serious penalties.
So I return to an argument I would make with my students when I challenged the prevailing “wisdom” that independent Central Banks make for better policy. I would argue that we entrust decisions of life and death (wars for example) to the elected representatives of the people --- why can we not figure out a way to make monetary policy more responsive to the people?(Spoiler alert:most of my students disagreed with me and supported Fed independence!)
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies.
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