The stage was set for a classic Washington showdown. Yesterday Stephen Miran, one of Donald Trump\u2019s key economic advisers, sat before a Senate Banking Committee to testify on his nomination to the powerful Federal Reserve Board. The President\u2019s relentless campaign to bend the world\u2019s most influential central bank to his will is gathering steam.<\/p>\n
For years, Trump lambasted Fed Chair Jerome Powell as a \u201cnumbskull\u201d and a \u201cstubborn mule\u201d for refusing to slash interest rates on command. But now the rhetoric has turned to action, with Trump firing the sitting Governor Lisa Cook over claims of mortgage fraud. Enter Miran, an acolyte who has publicly argued for the President\u2019s right to dismiss Fed governors at will, yet who promised in his written testimony to uphold the Fed\u2019s cherished independence.<\/p>\n
This dramatic confrontation has sent a familiar shudder through the halls of global finance: central bank independence, they tell us, is under grave threat. The guardians of economic orthodoxy \u2014 from central bank governors to mainstream economists and pundits \u2014 are ringing alarm bells, warning that political control of monetary policy would be a \u201cvery serious danger\u201d<\/a> to the global economy and would \u201cundermine the very foundations of our democracy\u201d<\/a>. This has been the mainstream mantra for the past 40 years. The narrative is clear: independent central banks are technocratic bulwarks against the short-term, populist whims of politicians, and their autonomy is synonymous with economic stability and democratic health.<\/p>\n The concept of central bank independence appeared in the wake of the stagflation crisis of the Seventies. According to the Chicago School economists, short-sighted, vote-hungry politicians could not be trusted with the levers of monetary policy: they would be tempted to juice the economy with low rates before an election, risking longer-term inflation for short-term gain. The solution was to hand the keys to the economy to a priesthood of supposedly apolitical and neutral experts \u2014 technocrats immune from electoral pressures who could make tough, necessary decisions for the long-term health of the economy.<\/p>\n This idea was institutionalised globally in the Eighties and Nineties. Countries like the UK, Canada, and Sweden granted their central banks statutory independence. The pinnacle of this movement was the creation of the European Central Bank in 1998, designed from the ground up to be fiercely independent with a single-minded focus on price stability. To this day, it remains an unquestionable dogma. As IMF Managing Director Kristalina Georgieva stated<\/a> earlier this year, \u201cindependence is critical to winning the fights against inflation and achieving stable long-term economic growth.\u201d Any threat to it is treated as economic heresy. But this dogma collapses under scrutiny.<\/p>\n The most compelling rebuttal to the panic is also the simplest: the myth of independence was always just that \u2014 a myth. As economist James Galbraith noted<\/a>, the historical record shows that since its inception the Fed has been a creature of the state. Created by Congress in 1913, its powers are granted, limited and revised through legislation. The Humphrey-Hawkins Act of 1978 also subjected it to regular congressional scrutiny. Congress, in other words, has always held the ultimate authority. It appoints the Fed\u2019s leadership and, crucially, has the legal power to mandate policy changes, a threat it wielded in 1982. Former Fed Chair Ben Bernanke himself once conceded<\/a> that \u201cthe Fed will do whatever Congress tells us to do\u201d. The debate thus shouldn\u2019t be about defending a fiction, but about deciding who the Fed should answer to: the
executive \u2014 as Trump would want \u2014 the legislature, or, ideally, the public.<\/p>\n