US President Donald Trump’s attempt to remove Lisa Cook as a governor of the US Federal Reserve is a brazen escalation of the administration’s long-running pressure campaign on the central bank. It is also a frontal assault on the Fed’s independence — and the question is how the Fed can take action to shield itself from political influence.
The Fed could start by being more specific about what independence means. Without invoking the term, Fed Chair Jerome Powell provided a good working definition in his speech at Jackson Hole, Wyoming, last week.
Members of the Federal Open Market Committee (FOMC) make decisions about monetary policy “based solely on their assessment of the data and its implications for the economic outlook and the balance of risks,” Powell said. “We will never deviate from that approach.”
In short: Data and expert judgement, not politics, guide Fed policy. The issue is how to fulfill the promise of an independent Fed.
The standard answers are unlikely to be sufficient. The staggered 14-year terms of the Fed’s seven governors have been a key protection from political interference. Every president has some influence in nominating board members, but typically no president gets to nominate a majority of the board. Cook’s term is set to expire in 2038, making hers a position that Trump should have no influence over. He is trying to reshape the FOMC not just in the near term, but over the next decade.
In the confirmation process, the US Congress could play a crucial role in safeguarding the Fed’s independence by ensuring that all nominees to the board agree to the Fed’s long-term strategy and goals for monetary policy. These goals — which the current group of Fed officials unanimously approved — adhere to the data-driven principles that Powell laid out. However, it is probably a mistake to assume that this congressional guardrail would hold in the current environment.
What else could the Fed do? Here are a few suggestions:
Be explicit about the costs of political interference. In his speech, Powell discussed upside risks to inflation due to tariffs, but did not mention the risks associated with a politically controlled Fed. The key lesson of the past five years is the harm that inflation inflicts on people. The Fed should apply the same rigor and candor to the risks of a political Fed as it does to the risks of any other event. Fed independence matters, because low inflation matters. Now is not the time for the Fed to be shy.
Open up the Fed. The Fed has a reputation for being a secretive organization, which makes it vulnerable to accusations of being political. Its closed-door nature could also conceal politically motivated decisions in the future. Livestreaming FOMC meetings and publishing primary reference materials such as the Tealbook, would show how the data-driven process works. It would also be a useful reference point if the Fed ever moves away from that process.
Safeguard the Fed presidents’ reviews. The central bank’s 12 branch presidents are to undergo their five-year reviews in February next year, with the board of governors voting on each president. Normally, this process is a formality, but the White House has already signaled that it sees it as a way to influence the FOMC. The Fed could try to pre-empt any concerns by providing details on the process and the review criteria.
As for Powell, he should commit to staying with the Fed for as long as concerns about its independence remain. While his tenure as chair ends in May next year, his governor position extends to 2028. He should retain it — assuring at least one vote in support of the data-driven principles he outlined last week.
Mariner Eccles, who was chair of the Fed from 1934 to 1948, is the only chair to stay on as a governor (until 1951), and he did so as the Fed was trying to regain its independence after World War II.
By staying on as governor, Powell would send a message to the White House that its pressure campaign would come at a cost: He is a “shadow Fed chair” it would want to avoid.
The Fed should not “go to war” with the White House. It cannot win, and at any rate it should avoid fights with elected officials. At the same time, the Fed needs to clearly explain to US Congress, financial markets and the public what is at stake.
Its statement on Cook, which ends by reaffirming its “commitment to transparency, accountability and independence in the service of American families, communities and businesses,” is good as far as it goes, but it does not go far enough — it is not yet available on its Web site. To win public support for its principles, the Fed needs to do and say more to prove its commitment.
Claudia Sahm is the chief economist at New Century Advisors and a former Federal Reserve economist. She is the creator of the Sahm rule, a recession indicator.
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