08/31/2025
We Must Defend Fed Independence but Enhance Transparency and Accountability
The White House is engaging in a blunt campaign to pressure the Federal Reserve to serve the goals of the administration. We have a better idea: Preserve independence, but require the Fed to be more transparent and accountable.
Empirical studies demonstrate that countries in which the central bank is independent have stronger macroeconomic performance. Unfortunately, in the current environment of growing political pressures on the Fed to lower interest rates to help finance rising public debt, the hard lessons of the failure in the 1960s and 1970s to choose price stability over political expediency appear to be lost. During the Great Inflation period of those years, the consumer price index 12-month rate peaked at almost 15% in 1980.
The recent pandemic experience reminded us of how crucial independence is. Even though inflation reached the highest levels in decades, long-term inflation expectations remained anchored, reflecting the public’s belief that America’s central bank would ultimately take the steps necessary to credibly bring inflation back to its 2% target. With fiscal policy boosting an economy already near full employment and the trade war expected to lift prices, there is a risk of de-anchoring of inflation expectations amid rising concerns about Fed independence. This outcome would be catastrophic for all Americans, and it would undermine the economic objectives of the administration. Threatening independence is counterproductive.
With the privilege of independence, however, comes the responsibility of being transparent and accountable. Even independent institutions alone cannot engineer robust macroeconomic performance without strong political consensus. Transparency and accountability not only enhance the effectiveness of monetary policy and promote financial stability, they also allow for better oversight by Congress and help garner strong public support, thus reinforcing independence in a virtuous cycle. I would like to highlight three concrete steps the Fed could consider to bolster transparency and improve accountability.
Empirical studies demonstrate that countries in which the central bank is independent have stronger macroeconomic performance. Unfortunately, in the current environment of growing political pressures on the Fed to lower interest rates to help finance rising public debt, the hard lessons of the failure in the 1960s and 1970s to choose price stability over political expediency appear to be lost. During the Great Inflation period of those years, the consumer price index 12-month rate peaked at almost 15% in 1980.
The recent pandemic experience reminded us of how crucial independence is. Even though inflation reached the highest levels in decades, long-term inflation expectations remained anchored, reflecting the public’s belief that America’s central bank would ultimately take the steps necessary to credibly bring inflation back to its 2% target. With fiscal policy boosting an economy already near full employment and the trade war expected to lift prices, there is a risk of de-anchoring of inflation expectations amid rising concerns about Fed independence. This outcome would be catastrophic for all Americans, and it would undermine the economic objectives of the administration. Threatening independence is counterproductive.
With the privilege of independence, however, comes the responsibility of being transparent and accountable. Even independent institutions alone cannot engineer robust macroeconomic performance without strong political consensus. Transparency and accountability not only enhance the effectiveness of monetary policy and promote financial stability, they also allow for better oversight by Congress and help garner strong public support, thus reinforcing independence in a virtuous cycle. I would like to highlight three concrete steps the Fed could consider to bolster transparency and improve accountability.
The Fed must improve communication.
High on my list is dropping the infamous “dot plot” in the quarterly Summary of Economic Projections, an anonymous diagram of the policy rate assessment of each individual Fed official.
While the “dot plot” played an important role in anchoring the expected policy path when the federal funds rate was at the zero lower bound, over time it has been misinterpreted by investors as a form of forecast. With interest rates now higher and inflation above target, it is time to rethink communication to account for high policy and economic uncertainty.
The Federal Open Market Committee – the Fed panel that sets interest rates – could publish more information about the inputs to policymakers’ economic outlook, such as their assumptions regarding fiscal and trade policies, and the response of monetary policy in a range of economic scenarios, such as slowing growth or higher inflation. That information would incentivize investors to price different possible outcomes, and show the broader public that policymaking is disciplined, fact-based, and nonpartisan.
While the “dot plot” played an important role in anchoring the expected policy path when the federal funds rate was at the zero lower bound, over time it has been misinterpreted by investors as a form of forecast. With interest rates now higher and inflation above target, it is time to rethink communication to account for high policy and economic uncertainty.
The Federal Open Market Committee – the Fed panel that sets interest rates – could publish more information about the inputs to policymakers’ economic outlook, such as their assumptions regarding fiscal and trade policies, and the response of monetary policy in a range of economic scenarios, such as slowing growth or higher inflation. That information would incentivize investors to price different possible outcomes, and show the broader public that policymaking is disciplined, fact-based, and nonpartisan.
The Fed needs more clarity on balance sheet policy.
Since 2008, purchases of US Treasury securities and agency mortgage-backed securities (MBS) have been used to lower the cost of borrowing for firms and households when the policy rate was stuck at zero. With total assets at more than $6.5 trillion today, it would help investors better assess the stance of policy if the Fed provided its views about the connection between the size and composition of its balance sheet and the level of short-and long-term interest rates. It could also articulate more clearly the circumstances in which it would purchase Treasury securities to help “market functioning,’’ and disclose more information about its plans to hold or sell such securities once market stress subsides.
The Fed could provide more information about its financial stability objectives.
The Fed could be clearer about the principles guiding its decisions to support broader markets, the tools it will employ, and, ultimately, how to prevent excessive risk-taking on expectations of more rounds of support in the future. This is important because since 2008 the Fed has increasingly stepped deeper into financial markets acting as a “market maker of last resort”, thus indirectly supporting institutions and markets it doesn’t supervise or regulate. The Fed could discourage “moral hazard” with better communication. Think about stablecoins. Are investors implicitly counting on central bank support of what is effectively “private money” in the event of stress?
The current political pressure on the Fed is misguided. The Fed must be insulated from short-term political pressures to promote its longer-term objectives of maximum employment and stable prices and to safeguard financial stability.
However, in a democratic society, this privilege is part of a social contract that requires the central bank to be transparent and accountable to Congress and to the public. To preserve its independence, the Fed has an obligation to continue to improve transparency as its tools and policy practices evolve over time. By acting now, the Fed could boost much-needed public support and reduce accusations that it operates with high discretion and political motivations.
The current political pressure on the Fed is misguided. The Fed must be insulated from short-term political pressures to promote its longer-term objectives of maximum employment and stable prices and to safeguard financial stability.
However, in a democratic society, this privilege is part of a social contract that requires the central bank to be transparent and accountable to Congress and to the public. To preserve its independence, the Fed has an obligation to continue to improve transparency as its tools and policy practices evolve over time. By acting now, the Fed could boost much-needed public support and reduce accusations that it operates with high discretion and political motivations.
