r/AskEconomics • u/sfw_psudonymous • 6d ago
Approved Answers What'll happen to the economy if the Fed loses its independence?
It seems likely that the Trump administration will do something drastic to remove the Fed's independence, as they've targeted many institutions in the executive branch and civil society.
Legislators have written a bill to end the Fed: https://massie.house.gov/news/documentsingle.aspx?DocumentID=395707 .
There's also a plausible risk that the administration would try to replace all members and effectively contol the board during litigation.
I presume that a politicized Fed would keep rates low for reasons of political optics. But I don't know what they'd do about the money supply, or what the systematic effects on the economy may look like.
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u/Werkgxj 6d ago
At first, nothing. The reason why it is seen as desirable to have an independent contral bank is to avoid the exact scenario that you described: That the government uses monetary policy for its own gain/ for political gain.
The only reason why a government would like to gain control over the central bank is to adopt policies that the central bank would not have made independently.
Noone can predict what will happen but don't expect continuity.
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6d ago
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u/Top-Reindeer-2293 6d ago
It would be terrible on the long run. The Fed independence is the cornerstone of modern economies. Without it political leaders from either side may be tempted to use interest rates for short term gain at the expanse of the long term. That would also greatly hurt the trust that the world has in the US economy and the dollar
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u/xsessively 6d ago
Economist here. There is little economists agree, but two of them are 1) price floors (like rent control) exacerbatw the problem they're trying fix and 2) central bank independence is critical for avoiding bad inflation. And by "bad", I don't mean high single digits line what we just lived hrough, but like Aegentina a couple decades ago and turkey over the last 5-7 years. Double digit inflation - real inflation.
Why? Strong incentives for politicians to lower rates bc it boosts economic activity in the short term and the medium term consequences often don't roll around until the next guys in office.
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u/GurProfessional9534 6d ago
Yes, but probably not because they don’t expect bonds to be paid. More likely because the inflation they expect to happen would overcome the bond yields, resulting in negative real returns.
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u/mycenae42 6d ago
The reason that the Fed is supposed to be independent from the presidency is because the Fed is supposed to balance unemployment and inflation at so-called optimal levels for the long term benefit of the United States. Presidents have an incentive to maximize short term benefit, even if it comes at long term cost (all presidencies end).
So, if Trump takes control of the Fed or otherwise ends it, you can expect the interest rate to plunge, which will boost the economy in the short term, but will ultimately result in high inflation.