Republican presidential nominee former President Donald Trump speaks during a campaign event in Howell, Mich. on Aug. 20.Evan Vucci/The Associated Press
Donald Trump has a history of dust-ups with the Federal Reserve. While in the White House, he repeatedly second-guessed Jerome Powell, his own appointment as Fed chair, and publicly griped about central bank decisions he didn’t like.
As the 2024 Republican presidential nominee, Mr. Trump has taken this a step further, arguing that the U.S. President “should have at least a say” in Fed decision-making. “I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman,” he said, pointing to his personal wealth to make the point.
Of all the bad economic ideas floating around both sides of the U.S. election, this is surely the worst. It’s questionable, to put it politely, that Mr. Trump would do a better job balancing the economy and controlling inflation than the raft of PhD economists and bankers running U.S. monetary policy.
More fundamentally, giving politicians of any stripe a direct say over interest rates would severely undercut central bank independence – a principle upon which a good deal of economic and financial stability depends.
Central banks haven’t always set monetary policy independently from politicians. Until the 1950s, the Fed regularly acquiesced to requests from the U.S. Treasury to keep interest rates low and to monetize government debt. Even after the Treasury-Fed Accord of 1951 formally separated government debt management and monetary policy, independence remained a work in progress. Historians often point to the cozy relationship between President Richard Nixon and Fed chair Arthur Burns as one reason inflation took off in the 1970s.
Over time, a set of laws and norms has enshrined independence as the key feature of inflation-targeting central banks, including the Fed and the Bank of Canada. The rules differ by country, but the idea is the same: The government gives the central bank its marching orders and appoints its leaders, then leaves it alone to achieve its targets.
At first glance, this can seem disconcerting. Central bank decisions directly impact household finances. Tight monetary policy hurts consumers and businesses and drives up unemployment. This is an enormous amount of power to put in the hands of unelected officials.
There are, nonetheless, good reasons to put technocrats at the tiller of monetary policy. Controlling inflation requires unpopular decisions – a willingness to slow down economic growth and squeeze household finances when the economy is overheating and prices are rising quickly. There aren’t a lot of politicians prepared to do that.
That doesn’t mean central bankers aren’t subject to democratic oversight. In Canada, the federal government determines the bank’s mandate every five years, and Governor Tiff Macklem and his senior deputy regularly appear before House of Commons and Senate committees.
It also doesn’t mean central banks can’t be criticized. Monetary policy makers in Canada and the U.S. made mistakes during the pandemic. They misread inflation and waited too long to raise interest rates. They have also since brought down inflation. On Tuesday, it came in at 2.5 per cent in Canada for July, down from a peak of 8.1 per cent in mid-2022. And that’s, so far, without a recession, a soft-landing many thought was unlikely.
It is fair to call out mistakes and demand better from the country’s most powerful economic policy makers. But politicians need to be mindful of undermining confidence in the central bank. A key part of keeping inflation low and stable is making sure people believe the central bank will do what needs to be done.
Canadian politicians should take note. None has gone as far as Mr. Trump in criticizing the central bank or calling its future independence into question. But politicians from across the political spectrum have been testing the limits.
Last year, several premiers urged Mr. Macklem to stop raising interest rates. This year, Finance Minister Chrystia Freeland – who actually has the power to tell the central bank what to do – openly applauded rate cuts. Conservative Party Leader Pierre Poilievre, the most vocal critic of the Bank of Canada, has promised to fire Mr. Macklem and argued for more Parliamentary oversight of the central bank. He has dialled back his attacks since becoming party leader in 2022. Let’s hope this more moderate tone continues.
With Mr. Trump, central bank independence is on the ballot. Canada must not go down that road.