A Federal Reserve official recently emphasized the importance of the central bank's political independence, following remarks made by former President Donald Trump, who has been critical of the Fed in the past.
The official highlighted that economic research has consistently shown that central bank independence is crucial for achieving sound policy decisions and positive economic outcomes. Specifically, studies have indicated that greater independence for central banks in advanced economies is associated with lower inflation rates.
This defense of the Fed's independence comes in the wake of comments made by Fed Chair Jerome Powell, who firmly stated that Trump did not have the legal authority to dismiss him. Powell also expressed his commitment to his role, stating that he would not resign even if asked by the president.
The official's remarks underscored the reasons why most economists oppose political interference in interest-rate decisions. An independent central bank can make tough decisions, such as raising interest rates, that may lead to short-term challenges but can yield long-term benefits by curbing inflation.
Moreover, an independent central bank enjoys greater credibility with financial markets and the public. This credibility helps in maintaining low inflation expectations among consumers and businesses, which, in turn, can contribute to stabilizing inflation rates over time.
Despite facing a significant inflation shock in recent years, measures of long-run inflation expectations have remained relatively stable. This anchoring of inflation expectations is crucial for ensuring price stability and sustainable economic growth.
