Powered by In this week’s Grumpy Economist rant, John Cochrane takes on the debate over Federal Reserve independence.
Is the Fed too political—or not independent enough? Cochrane argues that independence isn’t an absolute virtue. It only works when paired with a narrow mandate and limited tools.
As the Fed’s power expands into areas like financial regulation, climate policy, and crisis management, its claim to independence becomes harder to defend. The real question isn’t today’s interest rates—it’s whether the Fed should return to basics or become more accountable to elected government.
Transcript
Hi, I’m John Cochrane, senior fellow here at the Hoover Institution and welcome to my weekly rant. Today, we’ll talk about Federal Reserve independence.
As you may know, President Trump wants lower interest rates. He’s mused about firing Fed Chair Powell, he’s tried to fire fed Board member Lisa Cook, successfully replaced another board member Adriana Kugler with the CEA chair Stephen Miran, and the auditions for the new chair promise lower interest rates.
Independence! Fed independence! Everybody’s crying. Let’s think about that.
Now, I’m not as excited by low interest rates as the president, but let’s not make the mistake of mixing policy issues with structural issues. Should the Fed be independent? How independent?
And let’s also face that lots else is wrong at the Fed, whatever you think about higher or lower interest rates.
The Fed is vastly extended its power.
It’s made a bunch of mistakes that it hasn’t accounted for a financial crisis, 10 percent inflation, the Silicon Valley bank collapse, blocking financial reform, and its little forays into climate.
The Fed expands its powers like other agencies. Is the Fed not independent enough to resist these efforts? Or is it too independent and imposing its own politics?
Let’s also face Fed independence isn’t an absolute virtue. We do not, in our democratic government, appoint an independent Federal Reserve chair and tell them, “go print money and do whatever you want with it. You’re independent, we’ll never stop you.” No, that’s not the way it works.
The Fed is limited by a mandate: employment, inflation — and that means nothing else.
It’s limited in its tools. You can fiddle with interest rates, but not other things. For example, inflation. Suppose there’s too much inflation. What’s the easiest way to stop it? Take people’s money. What’s the easy way to get inflation going? Give people money. The Fed’s not allowed to do that. Why? That’s taxing and spending. Only the accountable Congress can do that.
The Fed is supposed to take care of employment. What’s the easiest thing to do about employment? Well, fix the labor laws, fix the disincentives, the social programs, the education system.
Overnight interest rates? What does that have to do with employment? But the Fed isn’t allowed to do those either. Those are intensely political. Too much from one pocket to another.
Save the climate? Reshoring manufacturing? Support vital industries? No! The Fed should never go there. That’s too political.
The price of great independence in a democracy is a limited mandate and limited tools. So, you can be plausibly technocratic and not directly distributing things from one person to another.
The Fed must say, “I’m sorry, that’s a really important policy goal, but it’s not our job.”
So, we have a Fed that has stepped into many of these areas that has much more power. Should it retain that greater power and be less independent, more accountable to the elected parts of government, or go back to basics and stay independent? You can guess which one I like.
What’s the point of independence anyway? Remember, the Fed is created by Congress for Congress’s purpose. Why did it set up an independent Fed in the first place?
People often say, “well, we need to insulate the Fed from politics,” but that doesn’t make sense. Your political interference is my democratic accountability when my party is in office and the other way around, when your party is in office. The Fed must, in fact, slowly and deliberately move to where voters desire because it’s there for our purposes.
The point of independence is pre-commitment. And the most important pre-commitment today is for the Fed to say “we won’t print money to finance deficits.”
And the government wants that pre-commitment. It wants to tie its hands to the mast to say, “we won’t print money to finance deficits,” because then you will buy our government bonds. If people think the government will always inflate away the government bonds, then they’ll never lend money to the government in the first place.
But you don’t want that pre-commitment too strong. You want to tie your hands to the mast, except if the ship starts to sink. If World War II comes along, you want the option to print money. You don’t want to lose World War II on the on the altar of no inflation.
Now, in 2021, the Fed did monetize debt, held interest rates down as if we were in a war. Predictably, we got inflation as if we were in a war. Independence did not seem to be an issue in this monetization. Just more independence isn’t going to change it. If you don’t want that to happen again.
So, I think if we don’t want to see this sort of thing again, if we want the Fed to go back to being more independent, it needs a much stricter mandate and then the independence to resist it.
Trump is moving at the speed of Trump and quickly before Congress turns and he becomes a lame duck. But remember, the power to a point is part of democratic accountability. And it would and should happen, although perhaps more slowly anyway.
Whether rates go up or down, whether inflation will come quickly or slowly if it happens, that will pass. These larger issues mean a much clearer, and, I think, more narrower mandate, which would allow the Fed to be much more independent.
For more on this, see my Substack, where there’s a couple of essays on Fed independence. And don’t forget to hit the subscribe button.
Read more from John Cochrane on Federal Reserve independence:
John Cochrane, “Central Bank Independence,” The Grumpy Economist, October 29, 2025.
John Cochrane, “Central Bank Independence Talk,” The Grumpy Economist, October 31, 2025.
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.