THE ECONOMIST: Independence

An independent U.S. monetary authority is imperative for economic growth, prosperity, stability, and — indeed — sustainability! Period!

About 50 years ago, my dissertation developed an early model of the monetary system and measured the effects of Federal Reserve policy. In the process, I read minutes of every Fed meeting since the early 1950s, a practice that I continue. Thus, I have absorbed the minutia of 70-plus years of monetary policy (no comments regarding my social life). Independence is essential!

For perspective, the Second Bank of the United States, which stabilized the economy following the War of 1812, was abolished by President Andrew Jackson in 1836. The country was without a central bank for almost 80 years, resulting in multiple financial meltdowns with no safety net. After the Panic of 1907, Congress created the Federal Reserve in 1913, formally added the Federal Open Market Committee in 1936, and instituted the “dual mandate” supporting full employment and stable prices in the Full Employment Act of 1946 (which was strengthened in 1978).

It is no coincidence that the mandate began at the dawn of the post-War era of global U.S. economic dominance and the emergence of the dollar as the linchpin of international commerce. The Fed has since responded to major wars, explosive conflicts, pandemics, droughts, currency crises, terrorist attacks, and the bursting of numerous bubbles. The capacity to rapidly make informed, research-based decisions largely insulated from politics is frequently invaluable.

In the early 1980s, Federal Reserve policies broke the cycle of double-digit inflation. The necessary short-term cost was significant and could not have happened without independence. As markets reopened after 9/11, the Fed implemented critical stabilization initiatives. As the Great Recession unfolded, quick and decisive action literally prevented a global collapse. During the pandemic, the Fed infused massive liquidity, avoiding incalculable human suffering. This response is (predictably) partially responsible for subsequent inflation, but the choice was a terrible option (inflation) or a catastrophic one. Independence allowed the Fed to pick the terrible one.

The Federal Reserve has consistently seen competent leadership supported by excellent research yield decisions to support its dual mandate. It has not been perfect but has been excellent and consistently credible.

Going forward, independence is even more vital. Decades of spiraling deficits have created the need to continuously borrow extensive funds, which requires that the world view U.S. debt as the very definition of a politically risk-free asset. There are warning signs of late. Last April 9, during the apex of the tariff fiasco, investors started looking elsewhere (which brought shockwaves and precipitated an immediate 90-day moratorium). We are now seeing greater movement to alternative assets and spiking gold prices, both definitive signs of faltering confidence in U.S. debt. Threats to monetary independence significantly heighten these concerns.

Every President wants the economy juiced with lower interest rates as elections approach, irrespective of long-term consequences. That decision must occur in a dispassionate and analytical manner devoid of politics, which is only possible with a strong and independent monetary authority. Stay safe!

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