Recent nominations to join the board of governors of the US Federal Reserve have raised concerns about political threats to the independence of monetary policy-making. The Economist has explained the dangers of weakened central banks, not only in the United States but also elsewhere in the world. And economists and economic journalists have questioned the economic ideas of US President Donald Trump’s latest Fed board picks, both of whom have now withdrawn their names from consideration for the post.
Chicago Booth’s Initiative on Global Markets invited its US panel of economic experts to express views on whether making political opinions the primary criteria for selection to the Fed would be detrimental to US monetary policy. Among the 40 panelists who participated in the survey, the response was almost unanimously affirmative.
Some panelists expressed what is now a longstanding consensus view in economics about central bank independence. As Eric Maskin at Harvard said, “Good monetary policy is largely technocratic, not political.” Robert Shimer at Chicago added, “Independence of the central bank is the cornerstone of good monetary policy.”
Others were explicit about the threat of a stronger influence of electoral politics on monetary policy-making. David Autor at MIT commented, “Monetary policy has an important public mission—and it’s not about electoral politics.” Maurice Obstfeld of University of California at Berkeley observed, “Sound central bank policy requires a long-term perspective that is insulated from electoral-cycle pressures.” And Robert Hall at Stanford wrote, “The obvious danger is an unwise monetary expansion timed to win an election.”
Two experts highlighted the word “primarily” in the statement to which the panel responded. Darrell Duffie at Stanford noted that “‘Primarily’ political implies (a) lower priority on skill at monetary policy, (b) could place weight on political over economic outcomes.” Chicago Booth’s Anil Kashyap stressed: “‘Primarily’ is key here. Diversity of thought and experience is good; picking central bankers because of political fealty is a very bad idea.”
Daron Acemoglu at MIT concurred with the statement but expressed an additional concern about Fed appointments: “Absolutely. But we should also worry about other things, including links to the financial industry.”
Larry Samuelson at Yale returned to the central point of the statement: whether monetary policy outcomes will be worse in future with appointments made on the basis of political views. He concluded, “The Fed derives its strength from its apolitical nature. A politicized Fed will not be nearly as effective.”