Commentary
The independence of the central bank has been increasing over the past decade or so. Central banks are regarded as panacea in the face of adverse shocks. Janet Yellen was threatened to be fired by Donald Trump, and Jay Powell was thought to be under political pressure to not withdraw liquidity early, thus leading to today’s high inflation. Presidents would have strong incentive to boost the economy in an easy way by instructing the Federal Reserve to turn on the printer (where fiscal policies need to go via congress). They are myopic in the long-run causing consequences.
The Fed’s independence was not granted from birth. Before 1934, it was chaired effectively by the Federal Reserve Bank of New York. After the Great Depression, the power of the Fed was then centralised in Washington and a chairman was formally assigned to the “Federal Reserve System” —the assigned chairman was Marriner Stoddard Eccles. When he became the chairman in November 1934, the U.S. economy had been hit hard and was in a very bad shape: Although real GDP rebounded strongly from an exceptionally low base, unemployment rate was at 21.5 percent, the century’s historical record….