Sep 1, 2021 - Economy

There's no such thing as an independent central bank

Illustration of Benjamin Franklin from a hundred dollar bill peaking out from behind an "open" American flag

Illustration: Sarah Grillo/Axios

The skirmish over Jay Powell's future as Fed chair provides a glimpse of a much bigger fight — one that could mark the beginning of the end of the modern era of independent central banking.

Why it matters: Powell epitomizes the way in which central banks, working alongside the government, took on the role of rescuing the economy from the shock of the pandemic. Now some lawmakers want to keep the relationship much closer than it has been in recent decades, to harness some of the power only central banks have.

The big picture: Central banks (the Federal Reserve, in particular) have never been more important, or more powerful.

  • The other side: Central banks have also never been as constrained in their range of possible actions. The natural interest rate is close to zero, which means that their main policy tool — the ability to set interest rates — also has to remain near zero.

Driving the news: Left-wing members of Congress have asked President Biden to replace Powell as Fed chair, saying that they want a "whole of government approach" to eliminating climate risk.

Between the lines: The letter clearly considers the central bank to be part of the government, rather than an independent agency working within a relatively narrow mandate.

  • The letter makes clear that central bank decisions are unavoidably political, especially when it comes to the issue of climate change. The Fed is either going to pursue a zero-carbon agenda or it isn't, and either way, it's going to upset certain politicians.
  • The EU implicitly capitulated to the reality of a political central bank when it appointed a politician, rather than an economist, to lead the European Central Bank.

Powell has a strong case that he stayed comfortably within the Fed's narrow mandates. Still, many of his programs were unprecedented, meaning the Fed is vulnerable to charges of mission creep.

  • The debate over Powell's renomination is really a debate over the degree to which Fed mission creep is something to be embraced and extended, rather than accepted only as a necessary evil.

The bottom line: Congressional gridlock means that the official terms of the Fed's mandate aren't going to change any time soon.

  • Unofficially, however, it has already been moving toward a greater emphasis on tackling inequality, which is nowhere in the mandate. If Biden is serious about the importance of the zero-carbon agenda, it makes sense that he'd want someone sympathetic to that view at the helm of the Fed.
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