Federal Reserve Governor Defends Central Bank Independence

Federal Reserve Bank of Philadelphia in Philadelphia on Nov. 4, 2024. Madalina Vasiliu/The Epoch Times

Federal Reserve Governor Adriana Kugler says maintaining the American central bank’s independent existence is crucial, warning that interference from the government would lead to adverse consequences.

“It has been widely recognized—and is a finding of economic research—that central bank independence is fundamental to achieving good policy and good economic outcomes,” Kugler said in a Nov. 14 speech in Uruguay. “It is not sufficient by itself to achieve those goals, but, over time, it is almost always necessary.”

She said that central bank policies “significantly influence prices, interest rates, employment, and income in the economy.” Policies that promote employment growth and economic activity put upward pressure on inflation. In contrast, policies to lower inflation tend to slow down economic activity and employment growth.

Kugler contrasted the difference in priorities between an independent central bank and an elected government which oversees national policy for a period of four to eight years.

“An elected government may be naturally focused on the short-term goals of its constituents and may have an incentive to try to lower the unemployment rate in the short run, with less concern about the longer-term effects on inflation and growth,” she said.

“This incentive may generate undesirable economic cycles, potentially destabilizing prices.” Delegating monetary policy to an independent entity like the central bank is a solution to avoid such situations, the Fed governor said.

Kugler’s statement on central bank independence was made after President-elect Donald Trump suggested the potential removal of Federal Reserve chairman Jerome Powell from his post, a move that would be perceived as political interference in the central bank. Powell was appointed by Trump during his administration in 2017 and took office in 2018.

In a Nov. 7 post, ING bank pointed out that Powell will “undoubtedly push back” against any attempt at his removal, “thereby asserting the Fed’s independence.”

“However, Powell’s term expires in February 2026 and Trump could nominate a candidate that is more willing to accommodate his views on interest rate policy.”

Trump Versus Powell

Earlier this month, Powell was asked in a news conference as to whether he would step down if requested by President-elect Trump. Powell flatly replied, “No.”

When asked whether the president has the authority to intervene in central bank issues by firing or demoting him, Powell said such actions are “not permitted under the law.”

In 2019, Trump was critical of how Powell handled interest rates. At the time, the president wanted the central bank to bring down the Fed’s benchmark interest rates to zero.

“Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision! A terrible communicator!” Trump wrote in a September 2019 post on social media platform X.

Financial services company Charles Schwab said in a Nov. 14 report that the markets will be watching whether the new Trump administration takes any steps to “weaken the Fed’s independence.”

None of the current Fed governors have a term that ends before 2026. As such, making changes to these posts prior to their expiry would likely raise “complicated legal questions.”

In a Nov. 9 social media post, former Texas congressman Ron Paul criticized Powell’s response and questioned the legal validity of the institution itself.

“Powell didn’t mention, however, that The Federal Reserve is unconstitutional to begin with. No power was ever granted to the federal government to create a monopoly bank that manipulates interest rates and counterfeits money,” he wrote.

“So the big issue is not who has more authority over the other; the president or the Fed chairman. The issue is that the Federal Reserve should not exist at all!”