Concerns about the Federal Reserve's independence have grown following repeated attacks by President Donald Trump, including this week's decision to fire Fed Governor Lisa Cook based on questionable allegations. But this debate is too narrowly focused on the president's political pressure, ignoring a growing danger in our system.
It is true that since the Treasury-Federal Reserve Accord of 1951, the Fed has had operational independence—the ability to set interest rates day to day—without any obligation to make government borrowing cheap. But it never had true economic independence because the bank's monetary policy cannot be insulated from the effect of fiscal policy, and vice versa.
As public debt grows, the link becomes more visible and fiscal dominance—which occurs when a central bank like the Fed becomes subordinate to the government's fiscal policy—looms larger.
