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Well, the comments recently by the White
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House about Fed Chair Jerome Powell
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bring us back to a concern over Fed
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independence that we saw pop up in the
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first Trump administration. Now, the
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importance of independence of the
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Federal Reserve is vital on the path to
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fiscal policy. Yet, it's seemingly
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challenged by the beliefs of both the
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president and some of his adviserss. But
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how much concern should there be right
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now? Peter Kiy Brown is an associate
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professor of financial regulation as
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well as legal studies and business
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ethics here at the Wharton School. He's
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also author of the upcoming book Private
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Finance, Public Power: The History of
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Bank Supervision in America, which comes
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out June 24th. And he also wrote The
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Power and Independence of the Federal
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Reserve back in 2016. Hi Peter, great to
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talk to you again. Glad to be here
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again. So, as this has all played out,
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especially in the last couple of weeks,
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uh give us your thoughts on this again,
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this kind of having to focus on the
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topic of independence of the Federal
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Reserve. You know, uh we never stopped
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focusing on it, I think. Um and and for
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good reason. The Federal Reserve has
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been endowed with extraordinary powers
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over our economy and through the
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economy, uh our society. And it's right
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for us as citizens and for the
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politicians we elect to hold the Fed to
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account and to be uh curious and even uh
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sometimes skeptical of the Fed's powers.
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That's called democratic accountability.
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But what we don't want to do is destroy
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it. We don't want to destroy what makes
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the Federal Reserve so important. and
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it's
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insulation from the day-to-day of the
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24-hour press cycle or the whims of of
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any president, Republican or Democrat.
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That's the stuff that we want to guard
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against. Not because we think that the
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Federal Reserve is some, you know,
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delphic oracle uh that knows things that
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can't be discerned from anyone else by
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anyone else in any other way. But it's
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because we think that turning monetary
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policy and economic policy over to a
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loyalty test to any one individual uh
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will create bad policy. And so we never
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stop focusing on it because we're always
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trying to get that line right between
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democratic accountability which is good
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uh uh without eroding technocratic
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expertise which is also good. And so
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that balance is what we're trying to
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strike. So talk a little bit about the
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kind of as the Federal Reserve was
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developed many many years ago, the
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importance of independence as a concept
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in its abilities over time to be able to
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put forth the policy that has kind of
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helped drive our our economy in general.
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You're right. I it's a great question
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and history has given us lots of
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examples, good and bad, about how this
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has worked. At the beginning in 1913,
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what we now call that independence, it
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wasn't called that at the time. uh it
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was more about letting bankers be
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bankers. So the idea is that bankers
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know best and so uh they'll know how to
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manage the economy in the interests of
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essentially profit maximization and loss
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minimization to the banks themselves.
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And the banks that I'm talking about are
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the Federal Reserve banks. But that kind
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of independence quote unquote uh led to
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the Great Depression. That's overstating
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it just a little bit, but uh Federal
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Reserve bankers acting in the interests
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of their shareholders are what made the
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Great Depression great. They just did
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too little uh of the kind of central
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banking that we'd want to see. Today,
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central bankers don't think of
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themselves as bankers per se. They think
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of themselves as technocrats, as
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experts. And uh over time what we have
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learned over many decades of experience
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is that when we let those experts keep
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their eye on the medium term uh then
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they're going to create policy that's
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better for all of us. Not perfect. We've
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seen some errors coming out of central
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banks uh in and not just the last
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decades but in the last few years. Uh so
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no one's claiming that central bankers
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are going to be perfect at their jobs.
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What we're saying is that they're going
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to be better uh than the alternative.
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And the alternative is setting interest
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rate policy from the Oval Office
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according to, you know, the whims of
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whatever the president wants to see that
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day. And that's the that's the main
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alternative to central banking. And
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that's what's under threat today. Well,
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you gave the the one example from from
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the past, but how frequently have we
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seen the independence of the Federal
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Reserve kind of tested by elements of
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the federal government over time?
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Oh, it's it's happened many many times
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uh uh to to lesser and greater extents,
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but there's been no no president in US
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history quite so enthusiastic about uh
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about pulling down uh uh institutions
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like Donald Trump. And that was true in
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his first administration. It's true now,
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too. What the Federal Reserve represents
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to President Trump is just sort of a
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separate power center. It's something
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that he's not controlling. We've seen
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his reactions to other kinds of separate
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power centers in the media, in the
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judiciary, in the
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military, certainly in Congress, in
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universities. Uh, and we see it in
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central banks, too. So, I'll say that uh
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there is bipartisan enthusiasm from
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presidents going back uh to Woodro
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Wilson with almost a a steady throughine
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uh until Donald Trump of uh being
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extremely impatient with the Fed. That's
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a part of the job when you take your
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oath of office there's like an asterisk
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that says also always be wondering what
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if the Fed is going to be in your
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interests the difference is what you do
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about it and there President Trump has
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shown himself uh to really vent his
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spleen on social media uh against the
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Federal Reserve and I think the the key
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point here Dan is that there are
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consequences to this and those are the
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consequences that that worry me the most
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because so much about Fed independence
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is about norms and conventions
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these kind of tweets, they undermine
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that independence in exactly that way.
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Well, and I guess even as we sit here
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today, there's a conversation about
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upcoming Federal Reserve meetings and
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whether or not we will see another rate
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cut by the Federal Reserve. And to a
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degree, it does make you wonder whether
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or not some of this commentary is having
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some sort of impact. And obviously Fed
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Chair Pal has talked a lot about the
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data, but still there is that question
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of when we see that next rate cut, is it
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somewhat influenced by what we've seen
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play out here? I think it's such an
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important question. And you know, Chair
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Powell would say absolutely not. We
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never let that kind of thing influence
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our thinking. And I think he's both
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right and wrong about this. He's
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definitely right in the sense that uh it
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is not in Jay Powell's DNA to capitulate
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like this. Um, and so I don't think he's
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scared of Donald Trump. I think he's
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ready to fight this out. Uh, uh, for
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sure. Um, but the narratives, the
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headlines after a cut that the, you
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know, Chair Pal and his his colleagues
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will say is justified on uh, on the data
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will always include every single one
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these articles will include this fight
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in it. And that shapes the narrative
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about the Fed and it shapes the
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narrative about the Fed's legitimacy.
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And it gives people uh questions to
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explore and think about uh that the Fed
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uh should not and does not want to want
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them to be thinking about which is
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exactly this question. Did the Fed cut
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in reaction to Donald Trump? Now,
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there's a bigger problem too with this
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and that is uh right now we're seeing
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the Fed have to make some calls and
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decisions about uh uh some hard hard
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challenges. Um but what we're what we're
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also seeing is we have a dynamic
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economy. Some very strange things are
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happening in it. And the great glory of
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the Federal Reserve is it is a dynamic
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policymaking body. So it can't just do
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what has always been done in the face of
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changing circumstances. It's going to
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need to do new things. And in order to
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do new things like we saw in 2008 after
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CO 19, many other instances requires
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political cover. You can't have
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experimental central bankers who are
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simultaneously managing a battle with
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the sitting president. And so when
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President Trump tries to demean the
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Federal Reserve in this way, uh he is
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he's limiting their power of
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maneuverability and that's extremely
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unfortunate. Peter, appreciate the time
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today. Thanks very much. All the best.
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All the best to you. Thank you. Thank
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you. Wharton's Peter Kiy Brown as we
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mentioned author of the upcoming book
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private finance public power due out on
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June the 24th
