The Risk to Fed Independence Is A Divided Congress
By Craig Torres
President Donald Trump’s recent appointee to the Federal Reserve, Governor Stephen Miran, is already out of consensus at the central bank. He wants to cut interest rates to near zero in inflation-adjusted terms by the end of the year even while several officials think the risk of further price pressures remains.
The Federal Open Market Committee cut the benchmark rate by a quarter point on Sept. 17. Miran dissented in favor of a half-point cut and said he is calling for an additional reduction of 1.25 percentage points in 2025, which would push the federal funds rate to a range of 2.75% to 3%. Fed officials estimate inflation will rise 2.6% next year, and a majority say risks are weighted to the upside.
Miran says he is independent. He was until recently Chair of Trump’s Council of Economic Advisers, and he remains on leave from that job as he fills out a Fed term that ends in January.
Trump can influence interest rate policy through appointments. He is attempting to remove Fed governor Lisa Cook over a mortgage disclosure matter. Jerome Powell’s term as chair ends in May, giving Trump another appointment should Powell step down before his separate term as a governor is up. Miran has written that the entire Fed system should be more closely tied to the political will.
Like it or not, Miran has cast a political shadow over the Fed which it has tried to avoid. Is this a tipping point in Fed independence?
The risk to independence isn’t Miran or a new chair, but rather the U.S. Congress, and the Senate in particular, which approves Fed nominations. The question for investors now is how much power over the Fed does the Senate cede to the president?
The Fed’s powers are delegated by Congress and its goals of stable prices and maximum employment are a matter of democratic consensus formulated in law.
The Fed reports to Congress, not the president. It must convince lawmakers that it can be trusted with its goals. It also must convince the public that it understands how to juggle those goals when they are in tension while serving as a fair arbiter of financial safety.
None of this has been easy. It is always going to be hard to explain why backstopping markets and financial companies helps mitigate bigger risks that could flow to households, who also suffered a sharp rise in inflation in 2022.
The Fed maintains high credibility. Even with independence under threat, market measures of longer-term inflation expectations are around the 2% target.
However, the framework of democratic consent with Congress looks fragile. Congress has exercised weak oversight of the Fed and the central bank itself has at times been unresponsive to oversight.
“We have a considerable amount of unanswered inquiries,’’ said Katie Warbinton, a spokesperson for Wyoming Republican Senator Cynthia Lummis. “The Federal Reserve would be wise to remember it’s accountable to the American people it serves.’’
Senate Banking Democrats say they have as many as eight unanswered oversight letters out to the Fed this year that remain unanswered.
Power gaps are quickly filled in Washington. The executive branch now acts like the effective oversight body with Treasury Secretary Scott Bessent criticizing the Fed for mission creep. Lawmakers could easily say: “We’ll handle it. This is our job.’’ But they aren’t saying much of anything.
“The Fed needs defenders and they need congressional defenders,’’ said Sarah Binder, a political scientist at the Brookings Institution and co-author of “The Myth of Independence’’ which describes the Fed-Congress relationship as interdependent. “When things go south, and the president attacks, they need someone to stand up for them.’’
Congressional neglect has taken many forms in recent years.
Let’s take the inflation overshoot of 2021 and 2022. The consumer price index rose to a four-decade high of 9.1% in 2022.
There were multiple forces behind that burst of inflation. Knotted supply chains created scarcity of goods. Large-scale fiscal stimulus, estimated at $5.1 trillion, boosted demand. Both were beyond the Fed’s control. But the inflation signals were unmistakable by mid to late 2021. Service prices began to accelerate, a signal that inflation wasn’t just in tradeable goods.
The Fed didn’t start raising interest rates until March of 2022, and by then inflation, measured by the Fed’s preferred index, had accelerated to a seven percent 12-month rate.
Brown University economist Gauti Eggertsson and former Fed vice chair Donald Kohn put some of the blame on an inflation tilt in a new framework the Fed adopted in 2020 and related guidance incorporated into FOMC statements. This is the kind of expert analysis that is available to Congress and could form the basis of a review or non-partisan fact-finding commission.
That isn’t the route lawmakers chose. Senator Sherrod Brown, an Ohio Democrat and then chair of the Senate Banking Committee, talked about corporate power and concentration in his opening remarks at the June 2022 monetary policy hearing. Senator Thom Tillis, a North Carolina Republican, blamed the Fed’s discretionary monetary policy and Biden stimulus.
This was a lost opportunity for deeper engagement with the Fed on its new framework.
The Fed is going to face some tough calls now and needs more dialogue with Congress to protect itself from political backlash.
House Financial Services Chair French Hill, an Arkansas Republican, is interested in Fed oversight and established a task force to look at monetary policy.
The task force held a hearing Sept. 17 to discuss a single price stability mandate for the Fed, but oddly Democrats held a side roundtable with former Fed governor Lael Brainard on independence the same day.
Political polarization has reduced oversight of the Fed, which has reduced democratic custody of the institution. The White House is stepping in, raising questions about whether Congress will defend the institution that it created.
The Fed doesn’t have a lot of tools for political fights, but it can work harder on defending credibility with more transparency. There has never been a better time to link each Fed officials’ appropriate policy rate estimates in the Summary of Economic Projections with their outlook for unemployment, inflation and GDP.
The Federal Open Market Committee cut the benchmark rate by a quarter point on Sept. 17. Miran dissented in favor of a half-point cut and said he is calling for an additional reduction of 1.25 percentage points in 2025, which would push the federal funds rate to a range of 2.75% to 3%. Fed officials estimate inflation will rise 2.6% next year, and a majority say risks are weighted to the upside.
Miran says he is independent. He was until recently Chair of Trump’s Council of Economic Advisers, and he remains on leave from that job as he fills out a Fed term that ends in January.
Trump can influence interest rate policy through appointments. He is attempting to remove Fed governor Lisa Cook over a mortgage disclosure matter. Jerome Powell’s term as chair ends in May, giving Trump another appointment should Powell step down before his separate term as a governor is up. Miran has written that the entire Fed system should be more closely tied to the political will.
Like it or not, Miran has cast a political shadow over the Fed which it has tried to avoid. Is this a tipping point in Fed independence?
The risk to independence isn’t Miran or a new chair, but rather the U.S. Congress, and the Senate in particular, which approves Fed nominations. The question for investors now is how much power over the Fed does the Senate cede to the president?
The Fed’s powers are delegated by Congress and its goals of stable prices and maximum employment are a matter of democratic consensus formulated in law.
The Fed reports to Congress, not the president. It must convince lawmakers that it can be trusted with its goals. It also must convince the public that it understands how to juggle those goals when they are in tension while serving as a fair arbiter of financial safety.
None of this has been easy. It is always going to be hard to explain why backstopping markets and financial companies helps mitigate bigger risks that could flow to households, who also suffered a sharp rise in inflation in 2022.
The Fed maintains high credibility. Even with independence under threat, market measures of longer-term inflation expectations are around the 2% target.
However, the framework of democratic consent with Congress looks fragile. Congress has exercised weak oversight of the Fed and the central bank itself has at times been unresponsive to oversight.
“We have a considerable amount of unanswered inquiries,’’ said Katie Warbinton, a spokesperson for Wyoming Republican Senator Cynthia Lummis. “The Federal Reserve would be wise to remember it’s accountable to the American people it serves.’’
Senate Banking Democrats say they have as many as eight unanswered oversight letters out to the Fed this year that remain unanswered.
Power gaps are quickly filled in Washington. The executive branch now acts like the effective oversight body with Treasury Secretary Scott Bessent criticizing the Fed for mission creep. Lawmakers could easily say: “We’ll handle it. This is our job.’’ But they aren’t saying much of anything.
“The Fed needs defenders and they need congressional defenders,’’ said Sarah Binder, a political scientist at the Brookings Institution and co-author of “The Myth of Independence’’ which describes the Fed-Congress relationship as interdependent. “When things go south, and the president attacks, they need someone to stand up for them.’’
Congressional neglect has taken many forms in recent years.
Let’s take the inflation overshoot of 2021 and 2022. The consumer price index rose to a four-decade high of 9.1% in 2022.
There were multiple forces behind that burst of inflation. Knotted supply chains created scarcity of goods. Large-scale fiscal stimulus, estimated at $5.1 trillion, boosted demand. Both were beyond the Fed’s control. But the inflation signals were unmistakable by mid to late 2021. Service prices began to accelerate, a signal that inflation wasn’t just in tradeable goods.
The Fed didn’t start raising interest rates until March of 2022, and by then inflation, measured by the Fed’s preferred index, had accelerated to a seven percent 12-month rate.
Brown University economist Gauti Eggertsson and former Fed vice chair Donald Kohn put some of the blame on an inflation tilt in a new framework the Fed adopted in 2020 and related guidance incorporated into FOMC statements. This is the kind of expert analysis that is available to Congress and could form the basis of a review or non-partisan fact-finding commission.
That isn’t the route lawmakers chose. Senator Sherrod Brown, an Ohio Democrat and then chair of the Senate Banking Committee, talked about corporate power and concentration in his opening remarks at the June 2022 monetary policy hearing. Senator Thom Tillis, a North Carolina Republican, blamed the Fed’s discretionary monetary policy and Biden stimulus.
This was a lost opportunity for deeper engagement with the Fed on its new framework.
The Fed is going to face some tough calls now and needs more dialogue with Congress to protect itself from political backlash.
House Financial Services Chair French Hill, an Arkansas Republican, is interested in Fed oversight and established a task force to look at monetary policy.
The task force held a hearing Sept. 17 to discuss a single price stability mandate for the Fed, but oddly Democrats held a side roundtable with former Fed governor Lael Brainard on independence the same day.
Political polarization has reduced oversight of the Fed, which has reduced democratic custody of the institution. The White House is stepping in, raising questions about whether Congress will defend the institution that it created.
The Fed doesn’t have a lot of tools for political fights, but it can work harder on defending credibility with more transparency. There has never been a better time to link each Fed officials’ appropriate policy rate estimates in the Summary of Economic Projections with their outlook for unemployment, inflation and GDP.
A version of this blog first appeared on MarketWatch
