Kevin Warsh gavels his first meeting as Federal Reserve chairman this week. Lisa Cook’s seat on the Board awaits a Supreme Court ruling the justices could hand down any week now. And Jerome Powell, having yielded the chairmanship, has chosen to stay on as a governor, something the Fed has not seen in nearly 80 years. Each twist has drawn the same anxious chorus: the central bank’s independence is sacred, and any encroachment upon it invites ruin.
This view is mistaken. Central bank independence is not a pillar of sound governance. It is a habit dressed up as an immutable law, which survives only so long as no one scrutinizes it. Two false yet widely believed claims hold it up. The first is that independence produces better economic outcomes. The second is whether walling off the Fed’s monetary and regulatory functions is compatible with the US Constitution. The first is overstated. The second actually points the other way.
Consider the evidence the defenders lean on. Decades ago, economists observed that countries with more independent central banks tended to suffer less inflation, and the observation calcified into doctrine. Yet the correlation has not worn well. It shifts with the sample and the method. Under closer inspection, it often vanishes. A plainer explanation fits the facts: Nations that respect the rule of law also tend to keep prices stable. The good effects of independence are downstream from limited constitutional government more generally. Sound money follows from sound institutions, not from an insulated class of bureaucratic experts.
The constitutional objection cuts deeper still. The Constitution vests in Congress the power to coin money and regulate its value. Furthermore, in performing its delegated duties — implementing monetary policy, supervising and regulating banks, making emergency loans, and bringing enforcement actions against banks, to name a few — the Fed unquestionably carries out executive functions. Those who wield delegated authority remain bound by the statutes Congress enacts and answerable to the Chief Executive who enforces them.
The modern Fed proceeds as though this structure were a suggestion. It regulates banks, affects the price of credit, and controls the monetary base (the nation’s ultimate settlement asset), all while shielding its leaders behind strict protections from removal. This is a problem because the Fed wields executive power by any honest reckoning. The Supreme Court has lately held that an agency cannot escape presidential oversight simply because it is staffed by experts. Strangely, it then indicated an apparent exception for the Fed. Yet no principle supports the exception. Only the fear that enforcing the rule would prove disruptive sustains it.
None of this is new. Milton Friedman laid out the case decades ago, and it has aged much better than the institution he critiqued. An independent central bank, he warned, cannot easily be reconciled with a government of laws rather than of men. It gathers immense power in a few (unelected) hands. This mutes responsibility, and hence, accountability.
Friedman also noted the mystique of central banking, which he believed was a deliberate tactic. By treating monetary policy as an arcane science beyond the ken of ordinary citizens, the Fed lifted its own record above scrutiny. That is good for the Fed, since its record is highly questionable. Recessions since 1913 have hardly lessened in frequency and severity, and inflation has been a persistent feature of post-Fed economic life.
The years since have provided even more evidence for Friedman’s view. Following COVID-19, the Fed delivered the worst inflation in four decades, then tried to wash its hands of the matter with its talk of “transitory” price hikes and “supply-side” pressures. Just as worryingly, the Fed has strayed into climate and social justice crusades that Congress never authorized.
Independence did not give us excellence. It created an institution that takes credit for every success and accepts blame for zero failures.
What, then, is the alternative? Not a president setting interest rates from behind the Resolute Desk — that is a caricature, and a useful one for those who deploy it. What we need is real accountability. Make senior Fed officials removable for poor performance, as wielders of executive power are meant to be. Attach genuine consequences to failure. And narrow the Fed’s mandate to something legislators and the citizens to whom they answer can actually measure. Congress should change the Fed’s goals to price stability alone. This would replace the tangle of competing goals that allows the Fed to hide its poor performance. A single, legible objective is how we get from “trust us” to “show us.”
A deeper remedy Friedman favored still stands open: binding the dollar to a rule that leaves little to discretion. The clearer the rule, the less room there is for technocrats to meddle. But we are getting ahead of ourselves.
The first and more basic steps are long overdue. A free people does not excuse its most powerful officials from oversight simply because they have hard tasks or impressive credentials. Instead, free societies demand that they answer for what they do, the same as everyone else. The Fed has evaded that demand for more than a century. It is time to hold it to account.
