President Trump’s assault on the Federal Reserve is a naked power grab. The central bank, through its control of interest rates and influence on financial markets, is the most powerful and fast-acting agency of economic policy. For MAGA to gain control by ousting board members and packing the leadership of its regional operations is alarming. It raises the prospect of an economic policy rigged ruthlessly to favor the electoral prospects of Republicans.
It is possible that the bid for control will be warded off by the courts or that it will be stopped by bond market blowback. Anxious investors selling U.S. Treasuries will drive up interest rates — the opposite of what Mr. Trump wants. He may flinch.
For the Trump administration to be disciplined by the markets would hardly be an instance of democracy in action, but given the track record of the official opposition to date, America needs all the help it can get. A reflexive defense of the status quo is better than nothing. But that should not be confused with a political strategy. The MAGA assault on the Fed poses the awkward but important question: What kind of central bank should we want for America?
A sensible discussion about that question cannot start from political innocence. How we generate credit and money will always be political. The era of Fed independence since the 1980s was one of centrist technocracy. Over time it acquired a liberal tinge. But the central bank’s foundation emerged from the struggle by the financial establishment to contain the dynamic and challenging democratic and social forces of the 20th century.
The Fed was born in 1913 out of compromise between Washington and Wall Street. Both had been spooked by the populist mobilization of the 1890s, when heavily mortgaged farmers protested the inequitable effects of the gold standard. The Fed helped to finance America’s arsenal of democracy in World War II and the early Cold War, only gaining independence from the Treasury in 1951 when the two locked horns over interest rates. Its modern policy regime dates to 1979, when the Fed’s chair, Paul Volcker, raised interest rates severely to repress the inflation of the 1970s, at the same time crippling American industry and labor unions.
Right now, we are not in the kind of crisis that previously shaped the Fed’s history. We are not in 2008 or 2020, when the Fed hugely expanded its balance sheet to save the banking system and bond markets as we know them. Those might have been good moments to rethink the role of the Fed and to ask how much it was part of the problem of runaway finance rather than simply the all-saving solution. Neither the Obama nor the Biden presidencies wanted to grasp that nettle.
What we face now is a political crisis. MAGA is seeking to capture the bastions of the centrist establishment, including the Fed. That may not have the historical force of a banking crisis or a war, but the MAGA movement generates its own necessity, and in this case it goes to the heart of the administrative state itself.
Say the courts ward off Mr. Trump. It would be dangerous for liberals to settle for the status quo. MAGA forces certainly won’t. They will go on digging, not stopping until they have the Fed in their hands. Should Democrats want to entrench independence even more solidly, which would make the Fed even less accountable? If MAGA succeeds, what then? Say the Democrats win back legislative power. How will they set about undoing Mr. Trump’s legacy? What kind of new, post-Trump Fed will they build?
These are questions we did not face before. Tell me your answer, and I will tell you what kind of Democrat you are.
Hard-line centrists will presumably want to entrench Fed independence even more deeply. They will reaffirm the old neoliberal religion of the Volcker and Alan Greenspan era, insisting that independence, by giving central banks credibility, is the most efficient way of controlling inflation expectations and thus lowering the cost of keeping prices stable.
This has the force of economic consensus behind it. But it smacks of the before times, when we all knew the answer was, “It’s the economy stupid.” No one stopped to ask, “What economy?” or “Whose economy?” You let the central bankers decide — or was it the bond markets? Certainly not a politician.
Critics of the Joe Biden-Jerome Powell era will argue that the Fed must go back to basics — that the Fed’s failure to respond promptly to the price shocks of 2021 and 2022 unleashed an inflation panic and handed the election to Mr. Trump. That would suggest the need for ironclad anti-inflation discipline even in the face of huge supply shocks, as occurred during and after Covid. Perversely, it seems that there are some in Mr. Trump’s own coalition, including Treasury Secretary Scott Bessent, who favor a Fed shrunk down to this minimal role.
For his part, Mr. Trump, the supposed beneficiary of Mr. Powell’s carelessness, clearly does not agree. He thinks the way to consolidate his grip on power is to juice the economy with an open-taps fiscal policy and lower interest rates.
Do the Democrats have a vision beyond reaffirming the 1990s’ best practices?
In foreign policy, Jake Sullivan, Mr. Biden’s national security adviser, and his team got as far as formulating a “foreign policy for the middle class.” What might a monetary policy for the middle class look like? You might say that was exactly what the Fed governor Lisa Cook was appointed to deliver: the voice of a labor market economist with a special focus on racial inequality. She is now at the sharp end of a Trump campaign to oust her from the board.
Personnel is policy. But if progressives are serious about building a stronger and more equitable economy, surely they would want to go further than merely reversing Mr. Trump’s board packing. After all, if it has become commonplace to argue that trade policy was skewed against ordinary Americans, the financial system is even more drastically so.
In defending the status quo on Fed independence, you are defending an institution that is relatively well insulated from democratic politics but highly exposed to financial markets and the pressure of “too big to fail.” At the regional level, it is run by gaggles of local business grandees. When the going got rough in 2008 and 2020, what counted was Wall Street. And that is not a matter of personnel or personal policy preferences. It is a structural dependence anchored in America’s highly complex but also fragile market-based financial system. It really is too big and complex to fail. Fed independence from political pressure has tended to amplify that dangerous codependency.
To counteract the central bank’s lack of independence relative to high finance, there is a good case to be made not for less democratic accountability but for more. As the political theorist Leah Downey argues in her timely book, “Our Money,” if we conducted monetary policy as if democracy mattered, we might consider a system of periodic reviews of the central bank. This iterative process could extend to the central bank’s mandate. Should we limit it to price stability and maximum employment, as currently written into law? Might we add decarbonization objectives or other projects of industrial policy, for instance? Or should the Fed limit itself to delivering on its mandate by ensuring an abundant flow of credit?
There are arguments for and against. The point is to have the debate. And it doesn’t stop with the big picture. Why not periodically revisit the arcane rule guiding how the Fed invests its giant balance sheet? The decision affects trillions of dollars of assets. As the law professor and my Columbia University colleague Lev Menand suggests, the mechanism might be a triennial congressional review of the Fed’s budget.
One of the founding ideas of the 1990s consensus was that intelligent public debate about monetary policy was impossible and dangerous and therefore central banks should be independent. This view was always condescending. Mr. Trump and his sycophantic gang are depressing confirmation of the most pessimistic economist’s view. But that does not mean that the Democrats should close ranks around technocracy. Beyond denouncing Mr. Trump’s power grab, the opposition needs its own arguments and vision. It needs its own politics.
You might say that this is not the time or the place. We are in a moment when, in Yeats’s words, “the best lack all conviction, while the worst are full of passionate intensity.” Only a fool would choose right now to open the can of worms that is the constitutional foundation of money. But we are not free to choose. MAGA is on the attack. Our choice is what ground to fight on.
Adam Tooze is a professor of history at Columbia University, the writer of the Chartbook newsletter and the author of “Shutdown: How Covid Shook the World’s Economy.”
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