Jerome Powell: Federal Reserve must remain independent – but was it ever?

Last week, Kevin Warsh, a former official with the Federal Reserve, who many considered would succeed Janet Yellen as head of the U.S. central bank, revealed that President Donald Trump doesn’t view the institution as an independent body. After years of the Fed working with administration after administration, can anyone blame Trump.

This prompted Fed Chair Jerome Powell to express just how important it is for the Fed to be independent from political pressure, whether it is on the matters of employment, inflation, or regulations.

He said in prepared remarks in Stockholm:

This is a challenging moment for central banking. Opinion polls show that trust in government and public institutions is at historic lows.2 In this environment, central banks cannot take our measure of independence for granted.

For monetary policy, the case for central bank independence rests on the demonstrated benefits of insulating monetary policy decisions from shorter-term political considerations. But for a quarter century, inflation has been low and inflation expectations anchored. We must not forget the lessons of the past, when a lack of central bank independence led to episodes of runaway inflation and subsequent economic contractions.

As for financial stability, the crisis and the severe recession that followed revealed serious flaws at many private and public institutions, including shortcomings in supervision and regulation. The crisis and its aftermath led central banks to take extraordinary actions, actions that challenged the ingenuity of experts in the field and were understandably difficult to explain and justify to a skeptical public. While these actions were authorized by law and on the whole necessary to avert the complete collapse of the financial system’s ability to service households and businesses, they may have also contributed to the erosion of public trust.

Central banks are assigned narrow but important mandates. For monetary policy, the Fed’s mandate is to keep inflation low and stable and to achieve maximum employment. For financial sector supervision and regulation, part of our mandate is to foster the safety and soundness of individual institutions. In addition, we have a responsibility, shared with other government agencies, to promote financial stability. I view this responsibility as being highly complementary to other aspects of our mission: Financial stability promotes sustainable economic growth, and a stable, well-functioning financial system is an effective transmission channel for monetary policy. Indeed, there can be no macroeconomic stability without financial stability.

Within our narrow mandates, to safeguard against political interference, central banks are afforded instrument independence‑‑that is, we are given considerable freedom to choose the means to achieve legislatively-assigned goals. While the focus is often on monetary policy independence, research suggests that a degree of independence in regulatory and financial stability matters improves the stability of the banking system and leads to better outcomes.3 For this reason, governments in many countries, including the United States, have granted some institutional and budgetary independence to their financial regulators.

But is the Fed really an independent organization?

When Trump called the Fed a political tool for the White House, ECN wrote (SEE: Donald Trump is right – Federal Reserve is a political tool to help the White House):

Despite Minneapolis Fed President Neel Kashkari dismissing the notion that the Fed is a political institution, it really is a tool for the executive branch residing in Washington, D.C.

When it comes to Trump’s latest comments on the Fed, the mainstream media is treating it as some sort of conspiracy theory being purported by the presidential candidate. But the Fed has been a political institution for decades. Whether it’s President Nixon, President Bush or President Obama, the Fed acts in the interests of the White House or Congress.

During the 1960s, for example, President John F. Kennedy demanded greater money creation. What did Fed Chair William Martin do? He expanded the money supply by nearly three percent. Kennedy’s successor, Lyndon Johnson, wanted even faster money creation to pay for the Vietnam War. Martin agreed and grew the money supply by five percent.

This trend continued during the Nixon administration when Fed Chair Arthur Burns raised the money supply by 10 percent. When President Gerald Ford wanted money growth to slow down, Burns complied and lowered it to 4.7 percent.

In the 1990s, Fed Chair Alan Greenspan kept the money supply open to help President Bill Clinton avoid impeachment. We can’t neglect to mention Ben Bernanke’s involvement in the Bush and Obama administrations! We all personally witnessed that story.

The Fed has been doing this for so long. Here is what Thomas DiLorenzo writes at the Mises Institute:

“The Fed operates for the benefit of its executive branch controllers, the banking industry, and Fed employees themselves, at the expense of the rest of society which suffers from the economic instability it creates. Worse yet, many Americans have been conned into believing that the Fed Chairman operates like the Wizard of Oz, hiding behind dark curtains, pulling levers and pushing buttons to make the economy operate smoothly. So-called “scientific socialism” may have been the most absurd and destructive idea of the twentieth century, but it is nevertheless the guiding ideology of central banking.”

Powell may want to continue offering the illusion of independence, but the Fed has been there to provide political clout during administrations and election campaigns.