WARREN, Ohio – Kevin Warsh was sworn in May 22 as the new Federal Reserve chairman, and concerns have emerged over maintaining the independence of the central bank.
Warsh replaced Jerome Powell, who served as chairman from 2018-2026.
Prior to Warsh’s swearing-in, Beth Hammack, president and CEO of the Federal Reserve Bank of Cleveland, and a group of economists weighed in with their thoughts.
“Both during my career in financial markets and now as a policymaker, I’ve always believed that an independent and accountable Federal Reserve is essential for policymaking,” Hammack said during a recent Conversations on Central Banking webinar. “Monetary policy independence is important in achieving our dual mandate goals of maximum employment and price stability.”
Hammack said independence allows Federal Open Market Committee members to make their decisions based on incoming data, the evolving outlook and their own understanding of how the economy is affecting businesses and communities.
The 19 participants of the FOMC are decentralized, with seven from Washington, D.C., and the other 12 from each of the Federal Reserve banks across the country, including Hammack, who represents the Fourth Federal Reserve District, which includes the entire state of Ohio and portions of Pennsylvania, Kentucky and West Virginia.
“Each of the 19 FOMC participants bring in unique vantage points, background and regional perspective to ensure we make decisions in the best interest of the American people,” Hammack said.
She added that the FOMC chairman then testifies before Congress, giving transparency to the decisions made.
Michael D. Bordo, Board of Governors Professor of Economics and director of the Center for Monetary and Financial History at Rutgers University, has been researching the history of the Federal Reserve and how it has evolved over the years.
He pointed to 1951 as a turning point in the role of the Federal Reserve, and the 1960s as a period of real change. The Fed went from solving disputes and regional banking problems to becoming a policy-setting body. It decentralized influence from mostly New York researchers to experts and researchers throughout the county.
Relying on different economic research, the goals, focus and expectations evolved through the years, Bordo said. Some Federal Reserve regional bank economists focused on monetary aggregate targeting, while others pushed a rational inflation approach.
“The bottom line is, the Reserve Banks became important innovators in producing and disseminating knowledge on Fed policy,” Bordo said. “The Fed’s decentralized structure and semiprivate corporate governance of the Reserve Banks helped make this possible because it allowed for internal differences of opinion to be made public.”
He said a top-down, more monolithic approach makes it more difficult for new ideas to be adopted.
Athanasios Orphanides, professor of the practice of global economics and management, Massachusetts Institute of Technology Sloan School of Management, said at times, politics can get in the way of good public policy decisions, postponing unpopular choices for short-term electoral reasons.
“The foundation for prosperity in our economy is monetary stability,” Orphanides said. “An environment of high and volatile inflation harms stability. Even when this means making decisions that may be unpopular in the short run or perhaps harm some special interest and the electoral considerations of some politicians, we need an independent institution to make sure that decisions will be the best for society over the long run.”
He also pointed to the decentralized structure of the bank as critical to its strength and longevity.
He feels the Federal Reserve has overemphasized the goal of maximum employment and compromised price stability. Going forward, Orphanides said the Fed can interpret its mandate even better if it is protected from politics.
Ricardo Reis, A.W. Phillips Professor of Economics at the London School of Economics, said the central bank controls the flow of money. Therefore the central bank can use that tool to control inflation, and everyone benefits from the pursuit of price stability.
But Reis also said there are trade-offs to keeping insolvent, bad institutions afloat and resolving issues of government debt. He said policy may help some but harm others, and affect risk-taking decisions.
Reis pointed out that the U.S. economy doesn’t operate in a vacuum and has a strong impact on other countries.
The full Conversations on Central Banking webinar is available HERE.
Pictured at top: The Federal Reserve building in Washington. (FederalReserve.gov)