No, Fed independence isn't over

Trump's push for democratic control of the Fed and its independence are not mutually exclusive

- T TRAM MOHAN

United States President Donald Trump's decision to fire Federal Reserve Governor Lisa Cook has set off a firestorm among economic pundits. Ms. Cook was sacked for allegedly producing false documentation while applying for mortgages.

The pundits are right about one thing: Malfeasance has only provided Mr. Trump plausible legal grounds for removing Ms. Cook. The real reason is that Ms. Cook is part of the majority on the Fed board that has refused to heed his repeated call for a reduction in interest rates.

By firing Ms. Cook, Mr. Trump is sending out a message to members of the Federal Reserve board and the Federal Open Market Committee, the Fed's policymaking body on interest rates: The Fed cannot be at odds with the President for long. Democratic accountability of the Fed, Mr. Trump is saying, means that the elected authority should have a say in the conduct of monetary policy.

This is not your columnist's reading. It is exactly how US Vice-President J.D. Vance characterized the position in an interview with USA Today. As he put it: "Isn't it a little preposterous to say that the President of the United States—the elected President of the United States, working of course in concert with Congress—doesn't have the ability to make these determinations? I don't think that we allow bureaucrats to sit on high and make decisions about monetary policy and interest rates without any input from the people that were elected to serve the American people."

Is this the end then of central bank independence? The end of the world? Not really, much as pundits would like us to believe it is so.

Central bank independence was formulated against the backdrop of double-digit inflation in the 1970s. When politicians controlled monetary policy, people learned to expect high inflation. A wage-price spiral and high inflation followed. The lesson: Insulate monetary policy from politicians. Leave it to technocrats to implement an inflation mandate.