Trump Almost Has a Point About the Federal Reserve

"As Donald Trump seeks to take direct control of the Federal Reserve, the debate has fallen into a familiar pattern: Trump attacks a crucial institution; Democrats line up to reflexively defend that institution. This is unfortunate. Trump's attacks on Fed independence are likely illegal, and the consequences of him personally ordering dramatic interest-rate cuts could be profoundly harmful, but preserving the status quo would also be a mistake."

"The core idea of central-bank independence is that the setting of interest rates should not be influenced by the incentives of partisan politics. Economists have demonstrated what is common sense: Maximizing long-term economic health sometimes means short-term pain. But incumbent politicians, with an eye toward the next election, will always be tempted to sacrifice long-term considerations to avoid immediate hardship. Allowing a central bank to set interest rates without political interference solves this problem."

Donald Trump seeks to take direct control of the Federal Reserve. His attacks on Fed independence are likely illegal and personally ordering dramatic interest-rate cuts could be profoundly harmful. Preserving the status quo would also be a mistake because the central bank has long abused its power in ways that benefit the financial sector at the expense of everyone else. Central-bank independence aims to insulate interest-rate setting from partisan incentives because maximizing long-term economic health sometimes requires short-term pain. The Fed has set rates independently and largely wisely, yet it also regulates finance, runs payment systems, serves as lender of last resort, prints money, and executes bailouts. In 1994, Congress passed the Home Ownership Equity Protection Act requiring the Federal Reserve to issue strong regulations within six months to protect people from subprime mortgages, but the Fed declined to do so.

Read at The Atlantic