Accompanying the rise of populism and increased polarization across the world, many governmental institutions are being scrutinized for both their structure and their actions. Among these institutions, central banks have increasingly found themselves at the heart of political criticism. The Federal Reserve System, or the Fed, is the American central bank, and it functions as the ultimate money manager in the economy, with the ability to mint dollars and control borrowing costs. Its primary purpose is to maintain stable levels of inflation, strong employment, and reasonable long-term borrowing costs. A key feature of the Fed and other central banks in developed economies is their independence from major political institutions. This independence serves as a critical safeguard, allowing central banks to prioritize the country’s long-term economic stability over politically incentivized short-term growth. However, it is precisely this structure, which is rather disconnected from the immediate wants of the people, that has drawn criticism from populists around the globe. There will be times when the Fed takes unpopular actions that cause short-term economic pain. However, given the institution’s influence over long-term economic stability, shielding it from political pressures is crucial to preventing the implementation of short-sighted policies that could lead to prolonged financial harm.
The most important committee within the Federal Reserve System is the Federal Open Market Committee (FOMC), which meets eight times a year to set short-term interest rates. This decision has outsized consequences for financial markets, economic growth, inflation, and long-term prosperity. The board consists of the seven Federal Reserve governors, the chair of the New York Federal Reserve Bank, and three other heads of regional Fed banks that rotate every year. Each of the Federal Reserve governors making up the majority of this committee are appointed by the sitting president and confirmed by the Senate. However, unlike most other government agencies, governors serve 14-year terms, far exceeding a presidential cycle. One can think of these appointments as somewhat akin to Supreme Court appointments—albeit weaker in permanence, they are still designed to minimize external interference and protect the Fed’s decision-making from the whims of shifting political tides.
Central bank independence is important because it allows for difficult but necessary tradeoffs to be made that prioritize the country’s long-term economic health. For instance, government stimulus efforts and low interest rates can provide short-term boosts to the economy, but if left unchecked, they risk triggering long-term self-reinforcing problems, such as runaway inflation or unsustainable debt build up that cause painful deleveraging cycles. On the other hand, should the Fed hike rates, thereby making it more expensive to borrow money and harder to invest in new projects, economic growth could slow, financial markets could rout, and people could see a decline in their quality of living. While unfavorable for political optics, sometimes such a decision is necessary in the long run. Without independence, monetary policy could be co-opted by politicians with short-term motives, and should any of the aforementioned problems kick off—which could occur within a presidential term—we could experience years or decades of economic pain. The Fed’s independence acts as a simple counterbalance to political excesses.
The dangers of a politicized central bank are perhaps best illustrated by Turkey, where presidents have repeatedly pressured the central bank to cut interest rates and prioritize their own economic initiatives. Back in 2010, the inflation rate in Turkey averaged around 7.7 percent, a relatively high but still manageable level. Following political interventions to prioritize growth over inflation concerns, the average inflation level rose to double digits and a high of 25 percent in October 2018. Most recently, President Recep Tayyip Erdoğan’s unconventional belief that high interest rates cause inflation—contrary to standard economic principles— resulted in him firing the Central Bank governor. These demands drove the bank to enact erratic policies that have severely weakened the Turkish lira, fueled inflation toward the upper double digits, and shattered investor confidence. In stark contrast, the Fed in the United States has largely maintained its independence despite frequent political pressure, most recently by President Donald Trump. This independence has enabled the Fed to make key decisions, such as raising interest rates over the past few years to bring down inflation seemingly caused by supply chain shocks and pandemic stimulus. The difference between the Turkish and the American system highlights how crucial it is for a central bank to remain insulated from political influence to ensure a country’s economic prosperity.
Of course, central bank independence is not without its critics. Some argue that institutions like the Fed operate too far outside the bounds of democratic oversight, raising legitimate concerns about accountability. Others believe that the system has failed at its mandate of achieving long-run price stability. While it is true that not every crisis has been avoided, one cannot expect an agency to be perfect while using only a handful of policy levers and incurring shocks outside of its control. At the end of the day, the challenge lies in striking the right balance—ensuring enough independence to make sound economic decisions while maintaining sufficient transparency and public trust. In the Fed’s case, clearer communication, transparency in decision-making, and a consistent articulation of its goals may help mitigate some of these concerns, ensuring that the institution remains accessible and accountable without compromising its core mission.
In an increasingly polarized world that favors the erratic and powerful, the need for a strong and independent central bank is more urgent than ever. History shows that when these banks surrender to political influence, especially fringe ideas, the consequences can be disastrous: runaway inflation, economic instability, and long-term hardship for citizens. An independent Federal Reserve, however, is better equipped to make the difficult choices needed to safeguard the economy from political whims. Independence ultimately serves the greater public good by preserving economic stability for future generations. At a time when President Trump has made remarks that are not all too different in spirit from President Erdoğan’s and there are increasing arguments against more independent institutions, it is especially important to understand that having reasonable Fed independence should not be considered an institutional luxury—it is a fundamental necessity.