Financial stability requires an independent Fed

[WASHINGTON, DC] When US President Richard Nixon appointed Arthur Burns as Federal Reserve chair in 1970, he welcomed him to the job with these words: “I respect his independence. However, I hope that, independently, he will conclude that my views are the ones that should be followed.”

Nixon’s views were that the economy needed “lower interest rates and more money”, presumably in part because this would help his re-election bid in 1972. And Burns did fall into line, more or less. But the consequences were unfortunate: Fed policy contributed to high inflation, which reached a dangerous and disruptive level by the end of the decade. It took prolonged high interest rates and a deep recession for the Fed to bring inflation back under control.

Tensions between central banks and governments are nothing new – and this includes friction between the Federal Reserve System and the president of the United States. Presidents typically want to boost economic growth and want monetary policy to support this goal with lower interest rates. Central bankers, however, also bear responsibility for maintaining price stability and worry that overstimulating the economy for short-term purposes will end in tears.