Economist weighs in on the tension between the President and Federal Reserve Chair
‘The dangers of political interference with monetary policy are particularly acute for the U.S.,’ expert says
EVANSTON, Ill. --- As President Trump considers firing Federal Reserve Chair Jerome Powell, Martin Eichenbaum, the Charles Moskos Professor of Economics at Northwestern University, cautions that substituting a political appointee for an independently run institution would be a mistake, particularly now when the ratio of debt is unprecedented.
Quote from Professor Eichenbaum
“Monetary policy works best when it is conducted by an institution that is independent and not subject to political pressure. This view is supported by history and formal empirical evidence. Moreover, it is a view widely shared by most macroeconomists and the heads of our largest financial institutions.
“Elected officials have incentives to pursue policies that boost economic performance in the short term. But those policies eventually lead to higher and more volatile inflation rates. In the context of monetary policy, the incentive is to lower interest rates and increase the money supply. With a lag, this course of action leads to worse economic performance in the medium run. An independent central bank can make decisions based on long-term economic goals, like price stability and sustainable growth, rather than short-term political gain. That is the central lesson of the last 50 years, in which central banks were granted independence. We do not want to risk returning to 1970s-style inflation.
“The dangers of political interference with monetary policy are particularly acute for the U.S. The current ratio of debt to GDP has no precedent in U.S. history. Without independence, central banks will be pressured to print money to finance deficits. After all, it is easier, in the short run, to do that rather than undertake the tough policies that would put our fiscal house in order.”
Eichenbaum’s research focuses on understanding aggregate economic fluctuations. He is currently studying the causes and consequences of exchange rate fluctuations as well as the effect of monetary policy on postwar United States business cycles. He is a fellow of the Econometric Society and the American Academy of Arts and Sciences and a co-editor of the American Economic Review. He can be reached at eich@northwestern.edu.