For weeks, the Federal Reserve has been anguishing over what to do about interest rates. President Trump hasn’t. The Fed chairman, Jerome Powell, took account of the case for cutting rates (to stimulate a sluggish job market) and the case for holding them steady (to prevent inflation). Mr. Trump seems to believe rates should never go any direction but down, and on Wednesday the Fed obliged him, lowering its headline rate by a quarter of a point.
By statute and by tradition, the Fed is supposed to make its decisions free of pressure from elsewhere in the government. The president has been walking a fine line between complaining and intimidation. In July he labeled Mr. Powell a “numbskull” and mulled firing him. He announced that he was firing a Fed governor, Lisa Cook, though whether he has the authority to do so is now before the courts.
Other presidents have been impatient with the Fed, but none has assailed it with quite Mr. Trump’s gusto. It is not clear what he means for his campaign to achieve, beyond lower interest rates, which are useful not just for juicing a diffident economy but also for lightening the burden on a heavily indebted federal government. But there are experts who fear Mr. Trump is taking aim at something larger. The Columbia law professor Lev Menand recently told The Financial Times that Mr. Trump’s pressure on Ms. Cook threatened “something close to the end of central bank independence” in the United States.
This raises an obvious question: Would that be a bad thing? An independent bank is an unaccountable bank. Nervous though the question makes economists and financial insiders, are we sure, especially in this age of rampant inequality, that we want an independent Fed of the sort we have now?
For half a century, modern central banks have seen their role in policymaking grow steadily. At the close of Jimmy Carter’s presidential term in 1980, his Fed chairman, Paul Volcker, rescued the country from runaway inflation by driving interest rates to nearly 20 percent. Then, in the financial crisis of 2008-09, the Fed became the world banking system’s regulator of first resort. Not only did it flood the economy with money by buying a broad variety of assets; it also set up swap lines to ensure European financial institutions’ access to dollars.
The present-day Fed, in other words, is an institution of globalism. It symbolizes not just the achievements but also the opacity, the inequality and the de-democratization of our time. Those are precisely the problems that Mr. Trump’s majority elected him to fix.
The Trumpian domestic program is built around a critique of the so-called administrative state. In theory, government agencies that are insulated from the rough-and-tumble of electoral politics can operate without distractions and uphold high standards. In practice, Mr. Trump’s people argue, such agencies become self-serving nests of like-minded zealots. For the Trumpian base, the intolerant and ineffective performance during the Covid-19 pandemic of such federal agencies as the Centers for Disease Control and Prevention and the National Institute of Allergy and Infectious Diseases is a case study.
But opening the Fed up to the clamor of a democratic electorate sounds scary. Not every Fed governor is an elite macroeconomist, but all have access to top thinkers from M.I.T. and the University of Chicago and the University of California, Berkeley. After all the arguments over democratic principle are made and the value of American stocks — which is to say, your retirement — is being gambled over, who do you want calling the shots? Those M.I.T. guys, who for all their arrogance can tell an x-axis from a y-axis? Or the Budweiser-chugging, TikTok-watching, perpetually complaining American public, getting closer and closer to an underfunded retirement and with an established track record of seizing other people’s assets to fund its gluttonous tastes?
The good news is that the choice between technocracy and democracy may not be as stark as it looks. There are ways to reassert democratic oversight of the Fed without dispensing with expertise.
In 2018 Paul Tucker, the former deputy governor of the Bank of England, published a subtle book called “Unelected Power,” which addresses problems of central banking in particular and democratic delegation to technocrats in general. Mr. Tucker doesn’t see the Fed as destined to be a rogue agency. Its governors, after all, have to be confirmed in the Senate. And the Fed, for all its formal insulation from politics, depends for that insulation on Congress, which could eliminate Fed independence if it wanted.
Accountability to elected representatives is the source of the Fed’s legitimacy. The Fed should remember this, confining itself to macroeconomic and regulatory matters and staying out of political ones. Mr. Tucker gives an example: While central bankers can carry out the market moves to stabilize prices around an inflation target, they should not set the target. The people’s representatives should.
The executive branch, though also an expression of the people’s will, is not the right branch of government to check the Fed. As Mr. Tucker observes, the rates the Fed sets can “change, even transform, the consolidated government’s liabilities and assets, and so its risks and income streams.” This means the Fed’s power is a taxation power of sorts. There are clear constitutional grounds for managing it democratically. Unfortunately for Mr. Trump, the Constitution makes this a congressional responsibility, not a presidential prerogative.
Until recent times it was Democrats who tended to drag the Fed into workaday democratic politics — giving it regulatory responsibilities for extending credit to poor neighborhoods in the Community Reinvestment Act of 1977, adding a job creation mandate to the Fed’s duties in the Humphrey-Hawkins Act of 1978 and using the Fed (not congressional appropriations) to fund the Consumer Financial Protection Bureau in the Dodd-Frank Act of 2010. Back then Republicans were more likely than not to defend the board’s technocratic aloofness. Now, on the question of democracy versus technocracy, the parties have switched sides.
Or maybe it would be better to say that the parties are in the middle of a big argument over how we should practice democracy. Almost all Americans think that universal suffrage gives the best representation of the public will — but not all of them are ready to trust the public will in a pinch. The Fed is, on the whole, a more reliable shield against inflation than democratic politics. The inflation that followed President Joe Biden’s profligate stimulus spending in 2021 and 2022 is a confirmation of that.
But the Fed is also part of a larger economic system, one that has brought deindustrialization, open borders and nearly $40 trillion in government debt, which the public is understandably eager to see reversed. It is not surprising that some of the uncouth depositors are arriving at the doors of the bank and demanding to see the books.
Source photograph by Kevin Dietsch via Getty Images.
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Christopher Caldwell is a contributing Opinion writer for The Times and a contributing editor at The Claremont Review of Books. He is the author of “Reflections on the Revolution in Europe: Immigration, Islam and the West” and “The Age of Entitlement: America Since the Sixties.”
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