Fed independence? Compared to what?
By Scott Sumner
There are good arguments on both sides of the Fed independence question. However, it’s not a good argument to point to times when the Fed made a mistake, and then suggest that things would have been better with less Fed independence. Here’s a Matt Yglesias tweet:
Regarding both Trump’s statements on Powell and Volcker’s new revelations about Reagan, Fed “independence” seems highly overrated to me.
America would be much better off if Obama had pressured the Fed into a more pro-growth stance in 2015-2016.
Yglesias is right that America would be better off if Obama had pressured the Fed into a more pro-growth stance in 2015-16. Indeed that mistake probably cost Clinton the election. But that’s not an argument against Fed independence. If Obama had good judgment on monetary policy, then he would not have appointed a bunch of Fed officials who adopted an inappropriately tight monetary policy during the Great Recession. Nor would he have have told Christina Romer that the Fed was out of ammunition (i.e., that it had “shot its wad”).
As far as the advice from Trump, and from Reagan administration officials, in both cases the advice would have likely resulted in bad policies if adopted. We know that was the case regarding the advice from both the Johnson and Nixon administrations.
Regarding the “revelations” about Reagan, we should keep in mind that Reagan reappointed Volcker after the worst recession since the 1930s, caused by Volcker’s tight money policy. Also keep in mind that Reagan never criticized Volcker:
Top Reagan officials frequently criticized the Volcker Fed, but the president refrained. “Some of his staff would have liked him to come out fighting—criticizing the Federal Reserve when things got tough politically, and he just never did it,” said Mr. Volcker. Mr. Reagan reappointed Mr. Volcker in 1983 before selecting Alan Greenspan to replace him in 1987.
So it’s misleading the way some in the press are comparing Reagan to Trump.
Again, there are good arguments for reducing Fed independence. But these arguments are not to be found by examining the post-war record of American politics.