Julia R. Cartwright is a senior research fellow in law and economics at the American Institute for Economic Research.
A concept once regarded as more of an academic exercise may finally have met its moment: the monetary constitution.
President Donald Trump’s unprecedented public intimidation of Federal Reserve Board Chair Jerome H. Powell to lower interest rates has sparked bipartisan concern about the erosion of the Fed’s independence. The Fed’s power over the economy is no longer being defined and limited, but fought over, a posture fundamentally at odds with the American political tradition. Questions over the Fed’s role will intensify after Trump on Friday said he would nominate Kevin Warsh, who has been critical of the central bank, to replace Powell when his term as chair expires in May.
The Justice Department this month threatened criminal prosecution of a sitting Fed chair over construction budgets. Political pressure on the central bank is not new. One need only read the memoirs of Ben Bernanke or Paul Volcker to see how presidents have pressed Fed chairs behind closed doors. What is unprecedented, however, is how private interference has given way to overt, escalating political and legal theater, producing widespread economic anxiety.
Institutional stress has a way of transforming theory into necessity. A monetary constitution could take the form of a constitutional amendment that replaces the Fed’s discretionary rate setting with explicit constraints. For example, the amendment could require the Fed to follow a clearly defined inflation benchmark and permit interest rate changes only when the economy deviates from those targets. Binding the Fed’s discretion in this way would insulate monetary policy from political influence, addressing today’s economic anxieties and tomorrow’s vulnerabilities. We need monetary policy by principle, not by spectacle.
Congress has charged the Fed with maintaining price stability and maximum employment while granting it wide discretion to pursue its dual mandate. The Fed uses tools such as interest rate policy by buying and selling government debt, which expands or contracts the money supply, giving the central bank enormous influence over the economy.
For decades, economists have argued for rules-based central banking to replace discretionary interest-rate setting. Under current policy, the Fed relies on judgment, forecasts and committee deliberation, leaving decisions vulnerable to political pressure over the timing, pace and direction of rate adjustments. A law-bound framework has long been viewed as politically infeasible because the Fed’s influence over financial conditions enhances the government’s fiscal flexibility. In particular, the Fed’s large-scale purchases of government debt can ease borrowing constraints and expand the federal government’s capacity to spend.
The central bank’s independence, or at least the credible appearance of it, is not just a technocratic nicety. It directly impacts the financial well-being of ordinary Americans. The Fed’s success depends heavily on the growth of the money supply and inflation expectations. Firms set prices and wages based on what they expect costs and demand to look like in the future. Workers assume annual raises roughly aligned with 2 to 3 percent inflation. Long-term contracts, from labor agreements to mortgages, are written with those assumptions embedded.
Independence anchors those expectations by making the Fed’s pronouncements credible. Maintaining stable prices requires a central bank willing to tighten monetary conditions even as labor market slack increases, to slow growth during economic booms to prevent asset bubbles and to tolerate substantial political backlash. If markets believe politicians can override those decisions whenever they become inconvenient, inflation expectations drift upward, long-term interest rates rise, and monetary policy becomes less effective. The question is not whether the Fed has made mistakes — spoiler alert: it has — but whether monetary stability should depend on the courage of whoever happens to chair the institution.
The principle of a monetary constitution is straightforward: limit the scope for politically motivated interference. Such a framework could impose rules on money supply growth, requiring it to track the broader economy’s expansion. This would limit the kind of discretionary policy that allowed the Fed to expand the U.S. money supply by more than 20 percent in 2020, a move Warsh has criticized and a surge that greatly contributed to the inflation that followed.
Mandating regular audits of the Fed would enhance transparency, a requirement imposed on every major bank in America but curiously applied far more narrowly to the central bank. A monetary constitution could even allow or encourage private currency competition, including crypto, as an external check on official money. There are two potential paths for how such a monetary policy might be enacted. The first is a constitutional amendment proposed by Congress, which must clear Article V’s deliberately high hurdles. The second route is overhauling the Federal Reserve Act. Because the Fed exists by statute, Congress could rewrite that law to impose a narrow mandate or even phase out the current framework that allows for incredible discretion. This would admittedly be less durable than an amendment but far more feasible politically.
Either approach would deliver much the same result: monetary stability no longer tied to the preferences or fortitude of individual central bankers.
The post Tie the Fed’s hands. For everyone’s sake. appeared first on Washington Post.
