In the clamor of the campaign season, we are missing what should be a landmark event.
The United States has managed to bring inflation down without – so far – triggering a recession. This undeniable soft landing is a rare achievement that the conventional wisdom suggests has only happened one other time in the last 60 years. A good measure of credit should go to the Federal Reserve and the manner in which it operates – and yet that is now under threat.
Just two years ago, inflation in America hit a 40-year high, reaching over 9%. It has now come down to around 2.5%, falling more and more quickly than in other major economies. The Federal Reserve could be assigned some of the blame for inflation getting so high, though a lot of that seems to have been a result of the pandemic, when goods could not get to customers around the world. (The Biden stimulus was another factor, but it’s worth noting that inflation soared in many countries where the government handed out much less cash to its citizens.)
The real mark of the Federal Reserve’s achievement, though, is not that it made no mistakes. Everyone made mistakes in the midst of a once-in-a century event like the pandemic. It is that the Fed was able to course-correct in a careful, deliberate manner and, crucially, without much concern about the politics of its decisions. Even as many federal institutions become increasingly politicized, the Fed remains largely meritocratic. It is a place where highly trained experts try to do what is right for the country in the long term. The rate cut this week is one that most economists believe is reasonable and even disagreement was muted. The Financial Times applauded it, while the Wall Street Journal editorial board seemed in favor of a smaller cut. But even the Journal noted that it was not made for political reasons.
I am not romanticizing the Fed. It has made its share of mistakes. But people on the right and left who have worked there tend to find that the deliberations and decisions are largely devoid of politics. Alan Blinder, a former vice chairman of the Fed who also worked in the White House, has noted the contrast between the two places – with politics being dominant in the White House and good policy being the credo at the Fed.
The Fed’s independence has been hard-won and recent: It really begins with former Fed Chair Paul Volcker doing what was needed to bring inflation under control in the 1980s. (The stagflation of the 1970s had been caused in part by a weak Fed chairman who was bullied by President Richard Nixon into lowering interest rates to goose the economy in time for Nixon’s 1972 reelection campaign.) Since then, the Fed has steered the American economy through booms and bust with considerable success.
When I looked into this topic over 20 years ago for my book, “The Future of Freedom,” the Federal Reserve, along with the Supreme Court and the Armed Forces, tended to have much higher approval ratings than Congress. The point I made then was that it was telling that it was the places that could keep public opinion and pressure at bay that were most admired by the public. Congress, by contrast, which slavishly panders to the public, is despised by that same public. Today, everything is now seen in political terms. The Supreme Court’s ratings have sunk, partly because of its own missteps – with highly politicized decisions like Bush v. Gore and the most recent one on presidential immunity. And now there is an assault on the Fed.
Donald Trump has never liked the independence of the Federal Reserve, largely because he doesn’t like the idea of any institutions being independent of his control. He was enraged that several of his attorneys general would not act as if they were his personal lawyers. He fired the FBI director because he would not take direct orders from him. And so, despite the fact that he appointed the Fed Chair Jerome Powell, who is a lifelong Republican, he relentlessly criticized Powell when he was president – and did so again this week. Some of his acolytes, always more loyal than the king, are drawing up plans to curb the independence of the Fed.
The American economy is the envy of the world. It has recovered more strongly from the pandemic than any major economy and, unlike many other countries, has seen wages rise. Its major companies dominate the world. If you add up the top 10 public companies in Europe, they do not equal the value of Apple alone – or Microsoft or NVIDIA. But this image and reality rests on American monetary and regulatory policy that in crucial ways is still being handled in a serious, meritocratic and nonpartisan manner. If this last area of American strength gets politicized, it could weaken the foundation of America’s power, the edifice on which all else rests.