Saturday Macro: Fed Independence as Your Screentime-Limit Phone App
I laugh at a metaphor from Joe Weisenthal. Legal independence is no shield against political winds—but so far this is one of the very few things Trump is doing that is still benign...
I laugh at a metaphor from Joe Weisenthal. Legal independence is no shield against political winds—but so far this is one of the very few things Trump is doing that is still benign...
Joe Weisenthal quotes the wise Carola Binder:
Carola Binder (2020): De Facto & De Jure Central Bank Independence” <https://www.suerf.org/wp-content/uploads/2024/01/doc_f2217062e9a397a1dca429e7d70bc6ca_11095_suerf.pdf>: ‘Legal CBI… is virtually orthogonal to frequency of political pressure. And there are plenty of examples of central banks with strong legal CBI that face political pressure…. I is political pressure on central banks, rather than legal independence, that seems to have more explanatory power for inflation. I find that even when the central bank reportedly resists the political pressure, inflation still tends to rise following an episode of pressure. Perhaps even if the central bank does not change its monetary policy in response to political pressure, the pressure damages central bank credibility. The possibility that it might respond to pressure leads to higher inflation expectations and in turn to higher inflation…
And Joe writes:
Joe Weisenthal: <https://www.bloomberg.com/news/newsletters/2025-07-15/central-bank-independence-is-a-spectrum>: ‘Kevin Warsh, a longtime hawk who is now seen as a possible successor to Jay Powell, is suddenly a fan of rate cuts. FHFA Bill Pulte has been promulgating unfounded rumors that Powell might resign, while also criticizing him for not having cut rates sooner. OMB Director Russ Vought has slammed Powell for the Fed’s expenditure on office renovation. And of course Trump himself has criticized Powell’s rate policy repeatedly…. The Fed functions,,, as a somewhat independent body in Washington DC. But its status is still something like that screentime app, where the political will or desire to actually abide by these self-imposed institutional guardrails is starting to decay…. This could eventually have undesirable macro-economic effects…
The question with respect to Kevin Warsh is, with respect to whether he actually becomes Federal Reserve Chair, who will he then double-cross? Will he double-cross his affinity, to whom he is well-known as a reassuring hard-money guy. Or will he double-cross Donald Trump as he attempts to fill the shoes of Alan Greenspan?
And I would say that the political pressure has already been effective. Under Biden, there was a very solid FOMC majority that thought it was worth running substantial risks to try to ensure that the inflation rate got and stayed on a path to kiss the 2%/year PCE-index inflation target. Since Trump’s election the average for the core PCE inflation rate has been 2.7%, and there seems to be no enthusiasm on the committee to push it any lower. They see themselves as now having much bigger fish to fry than 2% vs. 2.5% vs 3.0%.
Mind you, I think this is a good thing. I have long thought that the 2%/year target was too low, and that the “credibility” you gained by sticking to it was a reputation for being unwilling to do the clearly right thing out of some combination of stubbornness and pride, and that was not the kind of reputation that you want to purchase. The danger I see is that the Federal Reserve will not hold the target line below 5%/year, or that markets will not believe that the Trump-pressured Fed will hold the target line below 5%/year.
This is an especially good thing because I think we have to look forward to a substantial downward shift in our real GDP numbers. Back before last November we had confidence that the trend real GDP growth number going forward would have a “3” as its first-digit handle. Now we will be lucky if it does not have a “1”: the “crackdown” on immigrants, the damage done to American science, and the breaking of production networks as the U.S. is forced into substantial decoupling from the globalized value-chain economy are all going to be substantial headwinds. Debt amortization burdens wreak havoc when nominal GDP growth is low. And now that real growth is likely to fall off, we need to stay above 2% per year inflation more than ever.
References:
Binder, Carola. 2020. “De Facto & De Jure Central Bank Independence”. In Ernest Gnan & Donato Masciandaro, eds. Populism, Economic Policies, & Central Banking. Vienna: SUERF, the European Money and Finance Forum. <https://www.suerf.org/wp-content/uploads/2024/01/doc_f2217062e9a397a1dca429e7d70bc6ca_11095_suerf.pdf>.
Weisenthal, Joe & Tracy Alloway. 2025. “Central Bank Independence Is a Spectrum.” Bloomberg Odd Lots Newsletter, July 15. <https://www.bloomberg.com/news/newsletters/2025-07-15/central-bank-independence-is-a-spectrum>
I remember the "stagflation" of the 1970s and especially the hardship caused by high interest rates in the early-mid 1980s. It's hard to imagine how Trump's chaotic tariffs could do anything other than simultaneously drive GDP down and prices up. We will be lucky indeed if Trump chickens out on the worst of his tariffs and we *only* have decade or so of high inflation and stagnate growth...
"And now that real growth is likely to fall off, we need to stay above 2% per year inflation more than ever."
An NGDP target of 5% would do the trick in practice, 4% if the Fed were doing _Flexible_ NGDPL targeting.
We REALLY DO need the Treasury to start issuing that Trillionth and more intermediate TIPS so the Fed cal fly less in the dark about market expectations.