As candidates vie to become the next chair of the U.S. Federal Reserve, they should heed the hockey legend Wayne Gretzky’s advice to “skate to where the puck is going, not where it has been.” With many economic pucks in play – from sticky inflation, mounting deficits and an artificial intelligence investment boom to potential financial fragility and concerns about the dollar’s global primacy – a big question for the global economy is whether the Fed will be allowed to do what it needs to do. Will it maintain enough autonomy and credibility to promote stable prices, maximum employment and financial stability when politics, increasing debt and market exuberance could be heading the other way?
The U.S. Congress designed the Fed to make expert judgments in the public interest, free from political influence and pressure. But President Donald Trump’s second administration has something else in mind. Some may say there is “no need to worry,” and that the Supreme Court will protect Fed independence by finding a way to distinguish it from other agencies over which the president has asserted a right to remove “principal” officers at will. Regardless of the outcome of litigation over the attempt to remove Fed Gov. Lisa Cook, though, the central bank’s independence already has been significantly impaired.
For example, Trump has asserted that all interpretations of law and reviews of agency expenditures, including by the Fed, fall within the purview of the White House and Justice Department. The administration also has taken control of all Fed regulatory policy, including its oversight of bank capital and leverage. The White House may claim that its control does not apply to the institution’s conduct of monetary policy, but this is a distinction without much difference.