Political pressure mounts on the Fed’s independence
In this article Timothy Taylor discusses a current campaign to “soften up” the Federal Reserve with public criticism regarding its staffing, budgeting, and supposed lack of accountability. The motivation is to reduce the Fed’s independence and bring it more in line with the wishes of the US Treasury and the President, particularly under a prospective Trump administration.
Criticism of Fed staffing and budget
- Treasury Secretary Scott Bessent and others publicly question whether the Fed is overstaffed, especially highlighting the roles of its PhD economists.
- The Fed’s employment levels have fluctuated over time, decreasing due to technological changes (like a drop in paper checks) and then increasing after the Dodd-Frank Act expanded the Fed’s regulatory responsibilities.
- About 21,000 people work at the Fed, including approximately 400 PhD economists, many of whom work outside pure research, such as in bank supervision and payments operations.
Calls for oversight and reform
Critics argue for external reviews of the Fed’s payrolls and capital projects, citing high spending as a sign of inefficiency.
Political vs. economic incentives
- The author notes the larger agenda is shifting control of the Fed to be more responsive to political demands, which has historic precedent.
- A new “Fed-Treasury accord,” reminiscent of the 1951 agreement that established the Fed’s independence post-WWII, has been floated by some political figures.
- The article warns that while political oversight is necessary, central bank independence is vital to avoid monetary policy being driven by short-term political interests.
Trying to Soften Up the Federal Reserve
By: Timothy Taylor – Journal of Economic Perspectives
Trump’s shadow Fed gamble
Kenneth Rogoff in this article discusses Trump’s plan to name Powell’s successor ten months early. He argues that this unusually early announcement aims to undermine Powell, who has resisted Trump’s pressure to cut interest rates. In addition, Trump intends for his Fed chair pick to lead a “shadow” Federal Open Market Committee (FOMC) that would publicly advocate for more aggressive interest rate cuts, thereby pressuring the official FOMC and Powell.
- Historical context
The shadow FOMC concept originated in 1973 by economists Brunner and Meltzer during a period of inflation criticism but had no real policy influence then. Trump’s plan is different as his nominee would be at the center of public and political pressure against the current Fed Chair. - Potential consequences for Fed independence
The early public apprenticeship might erode the future chair’s credibility, making the nominee appear as Trump’s loyalist rather than an independent policymaker. - Nominee considerations and risks
Leading candidates include experienced figures like Kevin Warsh, Kevin Hassett, Scott Bessent, and Christopher Waller. While capable, these nominees risk being seen as compromised by public association with Trump, which could diminish their influence at the FOMC and financial markets. - Economic risks of political pressure on the Fed
Pressuring the Fed to cut short-term rates too aggressively could raise inflation expectations and increase long-term interest rates, hurting everyday Americans by raising costs on mortgages, car loans, and more.
The Apprentice: Federal Reserve Edition
By: Kenneth Rogoff – Harvard University
