Concerns about the independence of the Federal Reserve have grown after repeated attacks by President Trump, including this week's decision to fire Governor Lisa Cook based on questionable accusations. But this debate focuses too much on the president's political pressure, ignoring a growing danger in our system.
It is true that from the Fed Tesura Agreement of 1951, the FED has had operational independence, the ability to establish interest rates day by day, without any obligation to make government loans cheap. But it never had real economic independence because the monetary policy of the bank cannot be isolated from the effect of fiscal policy, and vice versa.
As the public debt grows, the link becomes more visible and the fiscal domain, which occurs when a central bank such as the Federal Reserve becomes subordinate to the government's fiscal policy, is coming.
For example, the fiscal policy can occur in the name of financial stability, as it did in the United Kingdom in 2022. When Prime Minister Liz Truss announced unpaid tax cuts and new expenses, bond markets collapsed. The Bank of England was forced to intervene and buy long -date bonds “on any necessary scale.” The official justification was financial, but the underlying dynamics was the fiscal domain. The bank had to postpone the measures to fight inflation to deal with a fiscal decision.
The fiscal domain also occurs in the name of fiscal sustainability. Some economists, including me, have wondered if there were more doubts about the Fed to increase interest rates when inflation took off in 2021 that only a wrong situation of a situation that called “transitory.” The motivation for fiscal domain was there. So, and now, higher interest rates mean higher interest payments, more loans and greater deficit.
As economist at the University of Virginia, Eric Leeper Recently wroteFor the first time, the president is now making the connection explicit. Trump demands lower rates because high interest payments on government debt are “costing billions of taxpayers.” That is the logic of the textbook of the fiscal domain and a return to thought before 1951.
In contrast, the 1980s offered an example of a Fed president who refused to undergo fiscal domain. After Paul Volcker raised interest rates to combat inflation, from 11% in August 1979 to more than 17% in October 1980, he made clear during the administration of President Reagan that, regardless of fiscal consequences, he would not go back. The rates would remain high during the time that is necessary. Volcker even pressed Congress to do its share in the fight against inflation by reducing spending.
Volcker understood the interaction between monetary policy and fiscal policy. Over time, through a series of tax increases and eventual consolidation under President Clinton, it was the fiscal policy that adjusted to support disinflation.
Debt levels were much lower. Today, arithmetic is much less indulgent and our Congress is missing into action. Our debt is more than 100% of GDP. Interest payments are increasing and already absorb almost a fifth of the federal expenditure. If legislators deal with social security and insolvency of Medicare through greater loan instead of significant reforms, the debt will exploit.
What experts, who are correctly concerned about the independence of the Fed, ignore is that Trump's clear attempt to interfere is not a unique crisis; It is something that could become a lasting feature of high debt policy.
The Congress is subject to a simple and macroeconomic restriction: all government disbursements, including interest payments, must ultimately be financed through a combination of taxes, loans or monetary policies. When interest payments increase, the load will be carried out somewhere. If the Congress does not charge more fiscal income or exercises more expenses and restrictions of loan, that leaves monetary policy, which means suppressing interest rates or tolerate greater inflation to erode the real value of our debt.
Then, those who are only concerned about Trump's public navigation of the president of the Fed, Jerome Powell, lose the most crucial point: the pressure on the Fed will continue to exist regardless of who occupies the oval office thanks to the fiscal trajectory that was blocked years ago and the refusal of the congress of doing something about it.
The implications of chronic fiscal stress are sobering. It is unlikely that the inflation pressure will be suffocated. In fact, it is misleading to say that Fed alone controls inflation. You can only do it if the fiscal policy is aligned with that task. Fed independence, in a narrow political sense, becomes irrelevant when the arithmetic of the debt service dictates the results.
Without slower spending growth and real budget reforms, no amount of monetary maneuvers can restore stability. The question is not whether Powell, or his successor, will resist Trump's demands. It is whether Congress will behave in a way that allows the Fed to do its job.
Veronique de Rugy He is a senior research member at the Mercatus Center of the George Mason University. This article was produced in collaboration with the creators Syndicate.
