Missed Opportunity on Defending Fed Independence

• The Fed held its policy rate at a range of 3.5% to 3.75%. Two dissenters favored a rate cut.
• The Fed reiterated that current rates are within a “plausible” range of neutral, though it continues to lean toward future cuts as tariffs’ impact on inflation diminish.
• Chair Jerome Powell skirted all questions on his future role post chair and declined to opine on topics that could be political.

The Federal Reserve on Wednesday had an opportunity to make an important statement, even as it left rates unchanged.

I expected the Fed to address its independence with more conviction and stronger answers than we received. I’ve long been a fan of discussing the three mandates Congress gave to the Fed: pursuing maximum employment, price stability and moderate long-term interest rates. While I’ve written on how these mandates are misunderstood, my intention here is only to remind myself (and the Fed) their mandates are multiple and (often) conflict. I argue that in times like these it is critical to defend the Fed’s independence; for without it they cannot effectively pursue even their classic “dual” mandate.

Fed Chair Jerome Powell advised whoever chairs the Federal Open Market Committee in the future to stay out of politics. I argue that staying out of politics is different than sitting idle while allowing the institution to be drawn into politics. Today, the Fed is being drawn into politics. Yet, Powell said little regarding his reasons for his appearance at the Supreme Court during arguments over President Donald Trump's effort to fire Fed Governor Lisa Cook, Powell’s own video message to the American people about his indictment, or ongoing attacks on the Fed’s independence. Preserving price stability is not only about where inflation sits today, but also about where the American people believe inflation will sit in the future. To anchor inflation expectations, the Fed must be able to carry out its mission. Preserving independence sits at the heart of the Fed’s functioning and without it we can toss out any hope of the Fed achieving any of its mandates.

Regarding policy, it seems unlikely we will see another cut during Powell’s term as chair without a notable shift in either inflation or employment, neither of which appears likely. With Wednesday’s meeting we are clear of major hurdles, and I expect an announcement from President Trump soon on his pick for the next Fed chair. That chair likely will need to endure uncomfortably stepping into politics to keep the Fed out of the political arena.  

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