Donald Trump has declared war on the Federal Reserve’s independence.
On Monday, the president ordered the removal of Lisa Cook from the central bank’s Board of Governors. Cook, an economist appointed by Joe Biden, holds one of the 12 votes that determine whether the Fed will raise or lower interest rates.
Trump wants a central bank that will do his bidding. But he cannot legally replace Federal Reserve governors before their terms are up, unless they commit acts of neglect or malfeasance. So, his administration launched an investigation into Cook with the aim of generating a pretext for her ouster. They settled on the allegation that Cook once falsified records when applying for a mortgage. She contests the legality of her dismissal and refuses to forfeit her position.
To many liberals, Trump’s attempted removal of Cook is of a piece with his broader assault on America’s democratic institutions: Trump wants every federal agency to put his personal interests above their public responsibilities. His Justice Department does not seek to impartially enforce the law, but to reward Trump’s allies and harass his enemies. His Federal Trade Commission doesn’t enforce antitrust law to ensure competition but to coerce corporate genuflection to the White House. With his assault on Fed independence, Trump is seeking to corrupt yet another institution, so as to further consolidate his authoritarian regime.
Thus, the Brookings Institution’s David Wessel declared that Trump’s bid “to control the Fed” is “one more way in which he is undermining the foundations of our democracy.” In his newsletter, the economist Paul Krugman offers a similar view.
But some progressives disagree. To them, Trump’s attack on the Fed is categorically different from his perversion of other federal agencies, or efforts to harass and intimidate America’s other power centers.
In this view, the idea that the Federal Reserve should be free to make monetary policy without political interference is itself anti-democratic. The central bank’s decisions about interest rates shape outcomes throughout the economy. In a democracy, authority over such weighty matters must lie with the people’s representatives, not the technocrats and representatives of local business interests who comprise the Fed’s leadership.
The great historian Adam Tooze endorses this general perspective, in a rejoinder to Wessel and Krugman. Faced with Trump’s subversion of Fed independence, Tooze argues that Democrats should not defend that anti-democratic institution, but rather, pursue a “democratic politics of central banking.”
Progressive critics of the Fed make some valid points. The central bank offers direct representation to regional business interests, but not to labor or consumers. This skewed composition — combined with the Fed’s political independence — risks giving monied interests veto power over economic policy: By threatening to punish deficit spending with interest rate hikes, the central bank can theoretically discourage Congress from pursuing economic policies that Wall Street does not like.
Nevertheless, in my view, Trump’s removal of Cook can be meaningfully understood as anti-democratic – in part because central bank independence isn’t as contrary to democracy as progressives often suggest.
An independent Fed may better advance the public’s interests
It’s important to be clear about what the Fed’s “independence” does and does not entail. The central bank’s core objectives are set by Americans’ elected representatives: Congress has instructed the Fed to set monetary policy with an eye towards maximum employment and stable prices.
The central bank does enjoy autonomy over how to pursue these goals through the tools at its disposal (above all, the power to steer interest rates). This operational independence is assured largely by the fact that Fed’s governors serve 14-year terms and can only be removed for cause. This insulates the body’s key decision-makers from shifts in partisan politics.
The justification for such insulation is simple: The benefits of ill-advised rate cuts are immediate while their costs typically take many months to materialize. Once the Fed lowers rates, consumers and businesses quickly enjoy lower borrowing costs. And this typically yields an increase in spending and investment that juices growth.
But if the Fed cuts rates in the wrong economic climate, then such surges in borrowing can yield inflation months down the line.
In theory, these dynamics encourage politicians to cut interest rates in the run-up to Election Day, even if such a policy is unsound. After all, by the time voters feel the costs, they will have already cast their ballots. This risk is not entirely hypothetical. In 1972, Richard Nixon successfully pressured the Fed to cut interest rates ahead of his reelection campaign, interference that plausibly contributed to the ensuing surge of inflation.
It’s true then that Fed independence is founded on an analysis of electoral democracy’s potential dysfunctions. But it’s not obvious that this renders it antithetical to democracy.
As recent years have amply demonstrated, voters really do value price stability. And the electorate surely has clearer views on what monetary policy should achieve — such as low inflation and strong growth — than about precisely how the central bank should promote those goals. Congress’s decision to delegate these technical decisions to a politically insulated body, while mandating certain objectives and conducting oversight, might therefore best advance the public’s preferences. And indeed, there is evidence that central bank independence does yield lower rates of inflation.
Delegation is not inherently anti-democratic
Notably, this arrangement — in which Congress mandates goals but delegates authority over means to politically protected bureaucrats — is not unique to the Fed. And in some other contexts, progressives recognize its basic legitimacy.
Trump is arguably trying to force the Fed to subordinate the electorate’s long-term material interests to his own short-term political ones.
For example, Congress created the Consumer Financial Protection Bureau (CFPB) to combat exploitative practices by the financial industry. But it gave the CFPB’s administrators broad authority to make rules that advanced that objective. And it insulated the agency’s leader from political interference by providing them with a five year-term, which could only be terminated for cause. It was progressives who defended the democratic legitimacy of this arrangement, on the grounds that some insulation from industry lobbying and short-term political pressures would enable the CFPB to better fulfill its mandate. Conservatives disputed this and ultimately ended the CFPB administrator’s political independence through judicial challenge. This has left the CFPB more accountable to the president, but less faithful to its congressionally authorized mission.
Of course, the CFPB and Federal Reserve have different institutional structures and responsibilities. I am not saying that anyone who supported the CFPB administrator’s independence must therefore support the Fed’s. My point is just that Congress giving a federal agency a degree of administrative autonomy is not inherently contrary to democracy.
In any case, Congress can revoke the Fed’s independence at any time. The central bank’s existing prerogatives — including its governors’ protection from termination except for cause — reflect the decision-making of democratically elected officials.
Trump’s attempt to subvert that decision-making — by trying to remove a Fed governor on a pretext — is therefore anti-democratic in a procedural sense. Democracy depends on the executive’s fealty to established laws. And Trump’s actions are also potentially anti-democratic in their substantive implications: He is arguably trying to force the Fed to subordinate the electorate’s long-term material interests to his own short-term political ones.
The president flouting duly enacted laws is bad for democracy
None of this is to say that America’s existing approach to monetary policy is sufficiently democratic. If the Fed is going to provide representation to regional business owners, it should afford similar voice to workers and consumers. Further, Congress’s dysfunctional and anti-majoritarian character undermines the Fed’s democratic legitimacy.
America’s federal legislature wildly underrepresents certain segments of the public, thanks to the Senate’s inegalitarian structure. What’s more, due to the super-abundance of veto points in America’s legislative process, amending existing laws is often practically infeasible. Thus, Congress might be practically incapable of changing the Fed’s priorities and structure, even if there were a strong democratic will for such reform.
These realities are partly responsible for the steady aggrandizement of presidential power, and (small-d) democrats’ growing comfort with it.
Nevertheless, Trump trying to lawlessly impose his will on the Fed does not bring us closer to a democratic system of economic governance. Rather, it brings us closer to a personalist authoritarian regime. Liberals can reasonably condemn it on those terms.
