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The US Federal Reserve’s independence has been in the news, as President Donald Trump has pressured the central bank to lower interest rates, tried to fire Governor Lisa Cook, and threatened to prosecute Chair Jerome Powell.
Unclutch your pearls. Fed independence is not an absolute virtue. We cannot have a completely independent agency that prints money to use as it sees fit. Yes, the Fed should have a large measure of independence—about the same degree it has now—but maintaining that independence will require a narrower focus, a stronger set of rules, and a smaller set of tools to address the very specific policy issues under the Fed’s purview.
The Fed’s independence is already constrained by accountability—its governors are appointed by the president and confirmed by the Senate, and it makes regular reports to Congress—as well as by a limited mandate and limited tools. The mandate, which includes “price stability” and “maximum employment,” implies “and nothing else.” No matter how important combating climate change or reshoring manufacturing may seem, the Fed must ignore them. Though printing money and handing it out can powerfully stimulate the economy, and confiscating money can stop inflation cold, the Fed is denied these tools. Taxing, spending, and economic regulation must be the province of parts of the government held politically accountable via elections.
A discussion of the Fed’s independence should start by acknowledging that it has overstepped these bounds. The Fed has greatly expanded its activities, stepping into fiscal and political territory. Quantitative easing, by shortening the maturity structure of government debt, is fiscal policy. Mortgage-backed security purchases are credit allocation. Bailouts and market support transfer money from taxpayers to over-leveraged financial institutions. The Fed expanded unwittingly, in the press of events—such as the Great Recession and the COVID-19 pandemic—but it never retrenched.
Raising the drawbridge, hoisting the independence flag, and defending the status quo is not going to be tenable for long.
Financial regulation is stuck in the mold that big banks are too big to fail and too politically powerful to issue more equity. The Fed has waded into political issues such as climate change while presiding over a banking collapse, two big bailouts, the Silicon Valley Bank fiasco, and 10 percent inflation. When it has failed, it has offered only “it’s not our fault” excuses, not analysis or reform. Excuses imply that the Fed is powerless to prevent a recurrence. Perhaps the Fed is too independent. Or perhaps the Fed has not been independent enough, expanding in response to political desires.
Thus, the important question is not more or less independence, but how should the terms of the Fed’s limited independence be revised? The Fed could remain expansive, powerful, and political, but face more explicit direction by elected officials, as is the case with the Treasury. Or, the Fed could return to a narrower scope of activities consistent with its current or even greater independence. I favor the latter course. But raising the drawbridge, hoisting the independence flag, and defending the status quo is not going to be tenable for long.
Why does independence matter? The rationale is weaker than we often suppose. The limits matter more.
“Insulate the Fed from political pressure,” most say. “Don’t let the president goose the economy ahead of elections.” But governments are tempted to hand out stimulus checks, tax exemptions, regulatory favors, loan forgiveness, and other goodies ahead of elections. Yet we do not entrust these policies to independent agencies. Moreover, “political pressure” is the same as “democratic accountability” when your party is in power. If independent central bankers run amok, our elected representatives must have the power, eventually, to correct them. Independence must be limited, as it is.
Economists’ answer is time consistency: Precommitting to lower inflation in the future gives a better inflation/unemployment trade-off now.
The interaction of fiscal policy and monetary policy is an even clearer precommitment problem. Committing to repay bondholders, rather than inflate away debts, makes the government better able to borrow. Historically, the value of independent central banks has been much more about protecting against debt monetization and financial repression than forswearing the temptation to goose employment by accepting higher inflation.
But many policies that fall outside the purview of central banks, such as capital taxes and sunk investments, have severe precommitment problems. Once investments are made, governments are tempted to tax capital, default on debt, or grab property, “just this once.” Knowing that, people will not build or invest. Yet we do not assign taxing and spending to an independent Treasury.
The Fed did not intend inflation, but it chose policies that over and over have had that effect.
Independence alone is also a weak precommitment mechanism. Independent central bankers who share the government’s preferences will want to inflate every bit as much as the government does. Independence alone only works if the government appoints central bankers who are much more hawkish than the government. Such choices are not evident in appointments or Senate confirmations, to put it mildly.
Limitations on the Fed’s ability to inflate are more effective precommitments. Independence is an important part of the package, because monetary policy cannot be reduced to rules. The government can say where to go, but not how to get there. But the constraints on Fed action remain the meat of precommitment.
Resisting fiscal inflation is going to be the Fed’s biggest issue. At a 100 percent debt-to-GDP ratio (which the US has long since surpassed), each point added to the real interest rate is 1 percent of GDP added to the deficit. President Trump is already calling for lower interest costs on the debt, as after World War II. Will independence save us? No. In 2020, the Fed quickly monetized $5 trillion of new debt, and kept interest rates low for a full year. The Fed did not intend inflation, but it chose policies that over and over have had that effect. It cooperated voluntarily and enthusiastically with the administration.
When the current doctrines of independence developed in the 1970s, monetary policy had few fiscal implications, so it could be technocratic and a bit apolitical. That’s not our world anymore.
Resisting fiscal inflation is much harder than resisting inflation-unemployment trade-off temptations. The decisions to inflate versus enact spending cuts or tax hikes, or to let a crisis burn, are intensely political. It’s going to require a much stronger anti-inflation mandate from Congress, clearly signaling the elected branches’ desire. That mandate has to include Congress’s commitment to repay debts without inflation. Yet sometimes inflation is the least bad option. We would not have wanted to lose WWII on the altar of price stability. Congress must stand ready to declare and take responsibility for the rare exceptions.
Crisis intervention poses a similar precommitment problem. Bailouts are the only way to stop a run. But if the government predictably bails out creditors, people have little incentive to avoid risk, and the government is forced to intervene more often.
Again, independence alone won’t work. The Fed will not voluntarily abstain from intervening in a crisis just to contain moral hazard next time around. People will only believe the Fed (and Treasury) won’t intervene if they can’t intervene, and don’t need to intervene. And once a large enough crisis has started, not intervening is unwise. After all, 1933 was a pretty bad year.
Rules and mandates have to be the centerpiece of the framework guiding the Fed’s actions in such inherently political matters. Clean up (at last) the overleveraged financial system so the Fed doesn’t need to intervene so often. Add serious limits so that the Fed cannot intervene without an explicit congressional declaration that the rules are suspended. Independence still helps: The administration is likely to want to bail companies out too often.
Only independence accompanied by a more explicit limited mandate, limited tools, and stronger accountability will address the Fed’s expansion into fiscal and political territory, while maintaining and enhancing the precommitments needed for successful monetary policy and financial regulation.
“Congress is dysfunctional,” you may say. That may be true. But that doesn’t mean we should rush heedlessly toward autocracy or aristocracy in place of checks and balances.
John H. Cochrane is a senior fellow of the Hoover Institution at Stanford University and was previously a professor of finance at Chicago Booth. This essay is based on a talk that he gave in October 2025 at the Peterson Institute for International Economics’ conference on central bank independence in practice and that later appeared in revised form on his Substack, The Grumpy Economist.
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