Why Central Bank Independence Matters

This might be the least glamorous of the three posts I have about the election (the other two being – Revival of crypto and Rise of betting markets). But it’s an important one and worth paying attention to – the growing debate over the independence of the central bank.

Why Should We Care About Central Bank Independence?

A central bank is a national institution that controls the money supply, sets interest rates, and oversees the banking system. The U.S. central bank is called the Federal Reserve or the Fed. The Fed plays a key role in controlling inflation. For example, when inflation was high in recent years, the Fed raised interest rates to slow down the economy, which helped bring inflation down.

I wrote a post about it, but here’s a TL;DR of what happened: Inflation rises -> The Fed raises interest rates -> The economy slows down -> Inflation decreases.

Raising interest rates helps lower inflation, but it also slows down economic activity. Politicians don’t like this because it can lead to job losses and a sluggish economy, which tends to make voters unhappy. And when voters aren’t happy, they often vote politicians out of office.

Because of this, politicians often try to influence the central bank to keep interest rates low and boost the economy—even if that could lead to higher inflation in the long run.

What Happens When Politicians Interfere with Central Banks?

When politicians interfere with central banks, it can harm the economy. Here are two examples where political pressure on central banks led to major problems:

Zimbabwe: In the 2000s, Zimbabwe’s central bank printed too much money to fund government spending. This caused hyperinflation, with prices doubling every few hours. Eventually, the Zimbabwean dollar became worthless, and the country had to switch to using foreign currencies like the U.S. dollar.

Argentina: Argentina has a history of political interference in its central bank. Presidents often pressured the bank to keep interest rates low or to print money to finance government projects—especially during election years. This has led to high inflation, economic instability, and a loss of trust in the country’s currency.

Trump and the Fed

One of the reasons the Fed was able to bring down inflation in the U.S. is because it is independent. The Fed doesn’t need to worry about getting re-elected, so it can make tough decisions, like raising interest rates, even if those decisions slow down the economy or cause job losses.

Former President Donald Trump was very critical of the Fed. Like most politicians, he wanted to keep unemployment low to help his chances in the next election. Trump also suggested that presidents should have more control over the Fed, especially when it comes to setting interest rates. He argued that the Fed’s high interest rates were hurting the economy and preventing growth.

So, What Will Happen?

In all the heated debates on this topic, people don’t realize that the President doesn’t have the power to directly control the Fed. Although the President appoints the Fed chief, the President cannot tell the Fed what to do or fire the Fed chief!

The Federal Reserve was created by an act of Congress, so any major changes to its structure would require approval from Congress. In a Congress with a slim majority, it’s unlikely that any major changes to the Fed’s independence will pass.

So, I don’t expect any significant changes. And that’s a good thing. Keeping the central bank independent is important for our long-term economic stability.

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