President Trump has pressured and attacked the Federal Reserve and is now trying to replace governors. What are the consequences if the Fed is losing independence and moving toward presidential control? Cristina Bodea finds that the Fed was never the most independent and is becoming less so in the face of public pressure. That could make a normally conservative institution move toward enabling inflation and government spending. We also talk about international comparisons, populist pressure on central banks globally, leader gender, and the role of tariffs and democratic backsliding.
Guest: Cristina Bodea, Michigan State University.
Studies: “Price stability and central bank independence” and “Central bank independence before and after the crisis“
Transcript
Matt Grossmann: The fall of an independent Fed. This week on the Science of Politics. For the Niskanen Center, I’m Matt Grossman. President Trump has pressured and attacked the Federal Reserve, and is now trying to replace governors to move them toward much lower interest rates. What are the consequences of the Fed losing its independence and becoming more under presidential control?
This week, I talked to Cristina Bodea, my colleague at Michigan State University, about the effects of central bank independence and its backsliding. She’s an international expert on central bank independence and central bank governors. She finds that the US was never the most independent, and is becoming less so in the face of public pressure. This could make a normally conservative institution move toward enabling inflation and government spending.
We also talk about international comparisons, populist pressure on central banks, globally, leader gender, and the role of tariffs in democratic backsliding. I think you’ll enjoy our conversation. What is central bank independence and what does it achieve?
Cristina Bodea: Well, good question. It’s a little bit of a mirage, right? Because central banks are part of the government. So to talk about independence is just to simply say that we want parts of the government, to isolate them a little bit so that they are not part of the electoral cycle, and that they are able to do their job independent of day-to-day politics.
This doesn’t mean that they don’t have delegated mandates. It doesn’t mean that legislatures and/or executives don’t appoint the people working in these institutions. It simply means that day-to-day politics is not supposed to seep into how independent central banks make decisions.
But I say that it’s a little bit of a mirage, because in social sciences we have tried to measure it and it’s not easy to measure, right? So, we measure sometimes legal independence, right? We measure legal independence, meaning that we look at the laws that regulate the relationship between politics writ large and the central bank.
And when we look at these laws, we look at who appoints central bankers? What is the length of their mandate? How you can dismiss them? What is the relationship between politicians and central bankers when it comes to who has the final say?
What is it that they’re supposed to achieve? Low inflation, high employment, or together financial stability? And very importantly, what is the relationship between the central bank and helping the government’s finances?
Independent central banks have come out of this idea that they were appendices of ministries of finance, and meaning that they would finance fiscal deficits, they would finance businesses, they would finance development. But as it turns out, all that business was generally inflationary. So independence came out of this idea that you want to limit the degree to which central banks do that.
Now, if I want to be very pedantic, I would bring this example from, it’s a famous paper published in 1992 by Alex Cukierman, Webb, and two other co-authors. And they give the example of the frog and the toad. And the frog and the toad have this conversation about the cookie jar, and monetary policies like a cookie jar because it is very fast at generating what you want, which is a boost in employment, a boost in growth. So it’s hard for you to abstain from it.
And Toad and Frog basically talk about putting the cookie jar somewhere on the top shelf, and that’s the parable of independence. You put it on the top shelf. But of course, then they talk about, “Well, but we could bring a ladder and perhaps we could actually perhaps still touch it,” right?
So its independence is a little bit of a misnomer because central banks are always part of the government, and governments can always come back, change laws. Governments can always come back and appoint who they want. So, independence is just a little bit of an arm’s length relationship.
The reason we want it is, because while it’s a cookie jar and it brings you a great sugar rush, it is also if governments control monetary policy, it has proven that many times that is inflationary. You abuse this, and delegation of monetary policy to independent central bank is a way for you to control inflation, is a way for you to ensure price stability.
Matt Grossmann: And is the US considered an archetypal independent central bank, and what is its role historically in the global spread?
Cristina Bodea: So the US Federal Reserve is, given the 1913 Federal Reserve Act and its amendments, it is not considered a hugely independent central bank, but just based on the type of law that we have in place. And we have fairly short mandate for the Fed chair. We don’t protect his job or her job explicitly.
And we have a double mandate for the Fed, unemployment mandate and an inflation mandate. And I guess think we’ll talk about this later, how double mandates can model responsibility, can model what the central bank is supposed to be doing.
So because of these, the US Federal Reserve is not rated as highly independent. If you rate the law and if you rate the law governing the European Central Bank or the Bank of Japan, or by comparison, the United Kingdom, the US comes fairly short just on the basis of the law.
However, historically-speaking, this de jure independence, or based on the law, has been supplemented by a very strong financial sector here in the United States that tends to dislike inflation, and the de facto independence of the Fed has been high, really high. Ever since the fall of the Volcker era in the 1980s, we have had a Federal Reserve that has been highly independent compared in relationship to day-to-day politics.
You asked me how the Fed figures into central bank independence globally. Well, and the United States is the largest shareholder of the International Monetary Fund. And while we don’t necessarily have, on the books, laws that protect the Federal Reserve to a great deal, the IMF and our interest in the IMF has been to push central bank independence globally, and we have supported this as part of a rules-based economic order globally.
Matt Grossmann: So we’re speaking as Donald Trump has just tried to fire a Fed governor over mortgage allegations, and has repeatedly voiced his interest in a new Fed chair and started nominating candidates for that position, even though… Or considering nominations for that position. And obviously, has made it clear that he wants lower interest rates, he has had other members of his administration call for specific large cuts. This has been an ongoing topic. So, how typical are these kinds of influence campaigns and these types of specific threats, and what role do they play in central bank independence?
Cristina Bodea: So, in the United States, ever since the Volcker era, there has been sort of a consensus, bipartisan consensus that the Fed should operate independently from politics. There have been calls for lower interest rates even in this era, but not to this extent. And the Fed officials meet with senators, they meet with the Treasury secretary, they meet with the president. If calls were made, many times they’re made in private and they’re made with a reasoned argument.
Well, these sorts of calls that we see right now are completely unusual, even compared to, I think, even compared to the Nixon era and the Nixon-Arthur Burns types of interactions. They’re just obviously made very publicly. We learned a great deal of the interaction between Nixon and Burns from Burns’s Journal and from the tapes that were run in the White House, but the types of pressure exerted on the Federal Reserve right now with these public calls for interest rates to come down, and not by a little, but like a lot, so 3% is a lot, they’re highly unusual and they’re large. They’re just not, “Well, let’s just move towards lower interest rates.” “No, let’s cut by 3%.” That’s huge.
Are these typical or are these sorts of calls seen somewhere else? The answer is yes, but they’re seen in places that perhaps you don’t want to be like those places. They’re seen in places like Turkey. In Turkey, Erdogan has asked for lower interest rates for a decade now. Also in the middle of high inflation, mind you. And when he didn’t get exactly what he wanted, he did proceed to fire central bank governors, members of the central bank board. So these calls for lower interest rates, they have been seen somewhere else, but the publicity, the public nature of them, the large demands and the collateral around them, these accusations against board members of the Fed for mortgage fraud or for running up costs in rebuilding the Fed building are just unusual.
Matt Grossmann: So you said we usually measure central bank independence based on legal text. So how do we recognize, I guess, backsliding of central bank independence when it is occurring, and do we know if this is part of a global trend of more executive pressure, less central bank independence?
Cristina Bodea: So, people have looked at the interaction between governments and their central bankers for a long time. We know that central banks are steeped in politics because of the cookie jar metaphor. It’s just hard to take it out. And also, there’s legitimate reasons to talk about what central banks are supposed to achieve and to talk about maybe rewriting their mandates, asking them to do different things, or asking them to do things differently.
That’s legitimate. They’re part of democratic ruling. It’s not as if they’re above the will of the people, but in this interaction, there’s different… So, the way I and my co-authors think about central bank independence is this idea that governments look around at what is on the table and they decide, well, temporarily it’s a good idea to change the laws and delegate more independence to the central bank, make them legally operate a little bit further away from day-to-day politics.
But the circumstances change. You can have a recession or you can have an election coming up, or you can have a different type of government coming to place that’s not necessarily all that interested in ruling by the rule of law. So things change, right? So how is the relationship between, say, a central bank that has been given independence through law and the government changing? Well, you could see politicians ask for interest rate reductions. You see them all the time, and they’re not that unusual.
The question is, how often do they happen, by how much, and what is the general context in which they happen? Politicians may ask them because it just looks good that you’re putting the blame on someone else. It’s not that they necessarily want to change the legal relationship between the government and the central bank. Politicians can also go and try to change the law. They can change the way in which they make appointments, they can change how many board members are in the central bank board.
Many board members are in the central bank board, they can change how the fiscal relationship between the government and the central bank is right. Is the central bank allowed to finance the government? At what cost? What is it allowed to find us? Right? They can change these sorts of relationship, so they can change the law. That has happened. Historically speaking, central bank independence has been on the rise up until sort of 2000s. Countries, for various reasons, wanted to delegate more of their monetary policy to independent central banks. Since the 2000s, we see steady decreases.
Some countries also keep increasing independence, but some countries also chip away at it. And the way we can measure trends is we can look at changes to the law. We can also, and people do look at this, scholars also look at attacks on central banks, right? Verbal attacks. And people also look at simply, well, has the governor been fired recently? And you have countries like Turkey where you have in two years, four governors, or countries like Argentina, where you have in one year four governors, and you have countries where that never happens because perhaps the governor has caved. So you have to look at all of this menu to understand exactly what is the evolving relationship between an independent central bank and a government.
Matt Grossmann: In the US ideological spectrum, we usually think about the left as more concerned with employment and maybe more dovish, and the right as more concerned with inflation and more hawkish. But obviously we have these examples like Nixon and Trump where it could just be the case that the party in power wants low interest rather, which ideological side it comes from. So to what extent, is there kind of that historical ideological relationship, or is it just kind of changes with the party in power, and then if there is a relationship, is it changing because of the rise of the populist right? That is, do you have leaders on the right who identify more with this populist insurgency and thus take this kind of anti-central bank posture?
Cristina Bodea: Excellent question. So just naturally, by its mandate, a central bank that is independent aligns more neatly with the traditional right-wing parties. That is because more independence is by definition related to having a single mandate that reflects inflation concern, and generally that is associated with right-wing parties. Historically speaking also, central banks do not necessarily like unions. Not because they don’t like unions, but because they don’t like wage indexation. So there’s also that, and because wage indexation is part of perpetuating inflation. So there is a natural attachment just by what the independent central bank does with the political right. However, people on the left, governments on the left, have also found independent central banks useful because you are gaining from the reputation of such an institution and you are simply seen as less likely to be inflationary if you have in place such a reputable institution.
And usually the left, as a reputation, has ta reputation for liking inflation more versus liking more unemployment. So with the rise of populist parties, it is unclear that populist parties want anything but low interest rates. It’s not clear that they’re interested in institutions generally. It is not clear that they’re interested in institutions that are tasked with keeping prices stable, so it’s just not clear that they’re interested in these sorts of mechanisms. Populist leaders, populist parties are, if anything, prefer to have low cost of credit and to be able to fire and/or berate technocratic leaders, elites, which traditionally populate central banks. So I don’t think we see… I mean we see in some instances what is the end game of that? We see it in Turkey, that is high inflation. We have not seen it in more democratic countries. We have not seen the end game of it. But I mean, if we are to actually learn from other countries, that seems to be where we’re going.
Matt Grossmann: What do we know about how the pressure is felt and materializes internally in central banks? That is, let’s say that Trump is not able to actually remove enough people or change policy, but continues with the pressure campaign. What is the effect of that on the operations of a central bank?
Cristina Bodea: So I personally was really fascinated by the relationship between Nixon and Burns. There’s a lot of discussion about, why is it that Arthur Burns, who was a respected economist, simply got rolled over. And some of that has to do with, well, perhaps he didn’t want to upset politics. Perhaps he was afraid for his job, and that may all be true. But it is also the case that raising interest rates is not a pleasant thing. So at the Fed, I imagine it takes a collective decision and a strength of feeling that you have to raise interest rates. Why? Because that will put people out of employment. That will cause even a mild recession that will increase the cost of borrowing. So to engage in those kinds of decisions, I think it’s really hard to take them.
Another celebrated Fed chairman said that, “The job of the Fed is to take away the punch bowl when the party starts.” Yeah, I mean, that’s a hard job. And to actually do it in the face of not just political pressure, because that’s one thing, but pressure on your life, pressure on your personal life, direct pressure to you, not against the institution, just against the institution, I think it’s really hard. Economists are not always sure, “Well, is it the right time to raise interest rates? Is it the right time to lower them?” They may be behind or ahead of the curve, and I don’t necessarily endorse technocratic, unchecked institutions, but to make these decisions I think is a really hard job. And to do them in the face of public pressure, I feel is terrible.
Matt Grossmann: So the Federal Reserve does a lot beyond monetary policy. It’s a fairly large bureaucracy at this point. It employs a lot of academics. It does some business regulation, and some of that might have made it an easier target for Trump. As you mentioned, he’s even gone after the construction expenses and obviously is part of a broader crackdown across the bureaucracy to some extent. So how typical is the Fed in all of its other activities, and have you seen this dynamic before where other things that the central bank is doing become a target?
Cristina Bodea: So central banks, like I said, they have delegated power, and this delegation happens generally through law. So the law also specifies what they’re supposed to be doing. What is it, their mandate? Very independent central banks are supposed to be in charge of inflation alone. Other central banks have other goals. They are in charge of perhaps sustainable growth. Maybe they’re in charge of financial stability. Many of them are in charge of overseeing that the payment system functions. Part of doing all of these things, sometimes you’re in charge of supervising banks, for example. The Fed does that. And so many times an expanded mandate is not a sign of greater independence. Why? Because you’re supposed to achieve all of these things, and you’re supposed to generally achieve them with a fairly limited amount of tools. At this point, the tool of the Federal Reserve is the interest rate.
And in the financial crisis, they invented all these other unconventional measures because the main tool was not working anymore. The moment you have these unconventional measures, the moment you have and you do other things, you open yourself up to interference, you open yourself up to an unclear job. Like, “What is it that you’re supposed to achieve?” And failure in one domain can bring failure or charges of incompetence on other parts of your mandate. So it’s a tricky terrain, but to a great degree, for example in the 2008 crisis, the Fed was called the only game in town. And being the only game in town means that fiscal policy is not readily and easily moving, not ready to respond to the threat of a major, major recession as a consequence of a financial crisis.
So the Fed does its best, I guess, to help both Wall Street and Main Street out of this pickle. But in doing so, it expands what it does and the tools that it uses, and it opens itself up to interference. There is significant evidence for example, that when central banks also have, as part of their job, financial supervision, inflation will be higher. Why? Because, well, if you’re in charge of financial supervision and you’re worried about banks failing, you will be more afraid to raise interest rates even if they need to be raised. So multiple mandates, multiple activities can threaten the independence of a central bank with respect to the limited domain of monetary policy.
Matt Grossmann: So you mentioned that some political pressure is kind of out of the bounds, like in Turkey where inflation was already high, a calling for reduced interest rates. But you also said that it’s a difficult role to play to set monetary policy, especially in the face of a dual mandate. And here Trump is not alone by any stretch, in calling for lower interest rates or in thinking that the threats to growth are higher than inflation right now. So what happens if it turns out that he’s right on the underlying policy and that in a year or two people believe that the Fed was late in lowering interest rates? Have we had any kind of situations like that? Are there times when the political leadership is judged to have been right and the central bank wrong, at least in retrospect.
Cristina Bodea: So it is clear that central banks make mistakes. I think the Fed made mistakes before the 2007/8 financial crisis, and it made mistakes just at least on two fronts, low interest rates, and also pursuing and being very much for the deregulation of the financial sector. So I think the Fed also probably made a mistake by not raising interest rates faster right after the COVID pandemic, when it was clear that inflation was fairly high. Again, at that point, the thinking was, “Well, this was once in a generation shock. We should err on the side of making sure growth is stable, and we have fairly well, well-managed inflation expectations.” People trust us on inflation, we can afford to wait, which is what they did. It turned out that well, inflation was high and was going to be higher and they should have raised probably interest rates sooner. So are interest rates too high right now? That’s a million dollar question. I mean, I would actually think that we are close to what Jay Powell says, which is perhaps this is a mildly restrictionary policy, but we have unemployment at 4.2%. Historically that is very, very low. Interest rates are just north of 4%, that’s not very high interest rates. So I interest rates may be slightly too high, but they have all the time, they have time to lower them. They have signaled that, “Well, look, we’re all going to look at the data, if unemployment looks bad”… They talk within the regional banks, they talk to businesses.
I mean, if anything, they should get it when businesses are stressed in terms of letting people go. They should get it ahead of time. So I trust that if the case is to be made that they should lower rates, they will. But the real question is, should the President of the United States tell the Central Bank what to do? And my answer to that is probably not. Should there be a debate about what should we prioritize at this point? What are the bigger risks? There should be a debate. I think there is a debate. There is a debate, and that’s a healthy debate. The question is not whether there should be a debate, but the question is whether someone should tell the Central Bank, someone with immense power, someone who can, I am not going to say fire people, but someone who can work to change central bank law as it is to tell them what to do.
Matt Grossmann: Sure. But we might be wrong. And the political consequences of that might be large if it turns out that we have a recession, and people say Trump was right and the Fed was wrong. Or even if the Fed starts lowering and Trump gets political credit for pressuring them. So are there examples of that kind of phenomenon where the political leaders, actually the pressure pays off for them politically?
Cristina Bodea: I don’t know. I mean, look, soft lendings are hard to achieve. So let’s just say that soft lendings, where you have raised interest rates to put down inflation and you’re trying to figure out when is the right timing to perhaps start lowering these interest rates. They’re called soft lending. Soft lendings don’t happen often. Of course, it’s politically consequential whether we have a recession, and it’s just consequential period. I think no one at the Fed wants a recession. So it is clear that they postpone interest rate increases because they did not want a recession, or they did want to be sure that they were out of the COVID recession. They don’t want the recession, the Fed doesn’t want a recession. Again, mistakes may be possible. I don’t think they want a recession any more than you or me. The question is about timing and getting it right. And it’s really hard to get it right. Soft lendings, they’re a miracle. It’s not an easy feat to achieve a soft lending.
Matt Grossmann: So this current situation is a bit different because one of the main risks that the Fed has been mentioning towards inflation is the president’s tariffs policy. And obviously we have economic reasons to be concerned about tariffs, and potential inflationary effects, or at least to look for them. But it sets it up as a more direct confrontation here where the president’s pursuing a set of policies, and the Fed is saying, “It’s those policies that are preventing us from cutting interest rates in some ways.” So have we seen similar circumstances to that? And I guess what are the implications of that where there seems to be more direct policy conflict beyond monetary policy?
Cristina Bodea: So central banks and the Fed are known to comment on policies that are likely to affect their mandate. They’re known to comment on fiscal deficits because fiscal deficits in the long run are inflationary. They’re known to comment on the value of the dollar, they’re known to comment on trade deficits. And so they’re known to comment on, for that matter, on indexing and wage indexation. And they’re known to comment on and cheer on deregulation. So they’re known to comment on a range of things because that affects how prices evolve, and it affects how employment changes.
I mean, under normal circumstances, I wouldn’t think it out of context that the Fed comments on tariff policy. Tariffs are a clear tax on imports, they are inflationary. The degree to which there is a seep from tariffs into prices, and how long it’ll take, it’s unknown. But what we do know is that, I mean, we’re fairly autonomous economy, our trade is 11% of our GDP, it’s not big. But we import a number of things, and it is bound to seep in the prices because the tariffs that we’re talking about are not small. How long it will take? I don’t know. There’s also a clear debate over this is a one-time shock versus something that will be built into expectations going forward.
I think that perhaps this is a legitimate argument, but in my personal view, the one-time shock argument doesn’t fly because we have had other inflationary shocks in the form of oil shocks. And we know from that experience that, I mean, that was more clearly about a one-time thing, but it has continued to seep and feed into inflation through expectations, through wage demands. And again, back then people were asked, people were told, “You should take this as a welfare cut.” It doesn’t help anyone if you are asking for a wage increase that’s not related to your productivity, but because you want to compensate for this welfare loss. It’s kind of a same situation here.
I just don’t think that short of price controls, short of muzzling unions, I don’t think that there’s a way to ask people to take it as a one shock and just forget about it. Again, we haven’t seen much in terms of a price increases from the tariffs yet, there’s various explanations for that. We just don’t know how things are going to play out. But from my perspective, it is not unreasonable for the central bank, and it just is consistent with the way central banks have talked that they talk about tariffs.
Matt Grossmann: So you said they also talk about deficits, and I know that you have research on the role of central banks in deficit spending. It’s come up a bit here because obviously we are currently running high deficits, and a substantial portion of the current budget is just debt payments, which are directly affected by interest rates. Obviously, the central bank could also be signaling concerns about the fiscal situation as well. So how does your research apply to the current US situation? And to what extent are central banks capable of playing a role in reducing the growth in the deficit?
Cristina Bodea: So you have monetary policy and you have fiscal policy. Monetary policy, let’s say, has been given to this independent central bank to run separate from day-to-day policies. But fiscal policy is clearly hugely political. It’s risky for central banks to comment on fiscal policy even though clearly fiscal policy influences in the long run inflation. Central bankers have commented consistently on fiscal policy. Alan Greenspan has, Mervyn King at the Bank of England has, Axel Weber who was head of the Bundesbank has. And generally they’re drawing attention to the connection between high deficits and the need for the central bank to take into account high deficits and perhaps raise interest rates as a consequence.
Alan Greenspan has drawn attention to the fact that, back in the day we had some budget rules and those budget rules were set to expire. And he was saying, “Well, look, don’t let them expire because we have a tendency to produce fiscal deficits.” And lo and behold, the budget bill that was just passed creates a huge fiscal deficit. And just mind you, that is a huge fiscal deficit, and we’re not in a recession, we are not in a health crisis, we are not in a war.
The projections are terrible because you want to reserve the ability to run fiscal deficits when you have these extraordinary shocks. And when you run fiscal, as a matter of fact, you just limit your ability to do it. At the same time, you de facto tie the hands of the central bank. So right now we have the arguments, “Oh, high interest rates increase the payments that we need to make on our debt.” Well, what do you know? We should lower these interest rates. Central banks fear that circle. And once the debt is high enough, it is not credible to make these threats that you will increase interest rates in response to fiscal deficit, it’s just politically you can’t do it. But I will say I have not heard the Fed comment on the fiscal deficits, which says it all, I think. Whereas they comment on other stuff, but they did not talk about the deficits that were coming out of the budget bill.
Matt Grossmann: You also have research on the role of central banks in democratic backsliding. Obviously, there’s a concern about the US’s general democratic standards. So what is the role of the Fed in that? Is it likely to be a constraint, or an accelerant for more power in the executive branch and fewer constraints?
Cristina Bodea: What we show in our research is that, so usually a central bank that is independent, it doesn’t operate in a political vacuum. It operates within sort of the country in which it is set, which means that it operates within the kinds of rules and the kinds of abeyance to rules that generally exists. Generally, we have shown that central bank independence, the way we measured it as rule-based, has better chances of say controlling inflation if you operate in a rule of law country. And by rule of law, it means the degree to which… I guess, I have to explain rule, right? So rule of law simply means, well, you’re not changing rules overnight. You have debate about rules, you have freedom of the press. So all of these things, independence actually exist in a de facto way.
What is going on here in the United States? I mean, without the rule of law, I don’t think that you can talk about independence of the Central Bank. I mean already the rules as they were did not give the Fed huge legal independence. And it was a practice and sort of a bipartisan consensus that the Fed as an independent institution is a useful institution.
An independent institution is a useful institution. Now, if that consensus is shattered, I just don’t see how the Federal Reserve can operate independently. Sure, you may not have to fire anyone, but they will listen very closely to what the politicians want and just do it, I guess. So what we found is that independent central banks can sometimes work even in authoritarian countries and they can work even in authoritarian countries, why? Because in some authoritarian countries you have what are called dominant parties, which means very strong parties that constrained the executive leader. So it is that these constraints exist that make an institution work. Without constraints, generally, these sorts of institutional arrangements just don’t work. They’re not going to work. So the Fed is part of the institutional setup of the United States. If rule of law were at large, sort of becomes less prevalent, the Fed will fall with every other institutional arrangement that exists.
Matt Grossmann: So the US Supreme Court certainly has an important role in maintaining the rule of law in the US and it has already voiced a bit of worry about the Federal Reserve in particular. That is in a case that did not involve the Federal Reserve, where they did not have to comment on the Federal Reserve. They went out of their way to say, “Even though the president can fire some members of the administration who are supposed to be independent, the logic doesn’t apply to the Federal Reserve because of its unique history.” And a lot of people paid attention to that aside, but maybe not Trump because he is sort of moving forward. So what is, I guess, the role of the courts in independent central banks? And in the US, how much will it matter if the US Supreme Court considers this a unique institution relative to the others?
Cristina Bodea: I don’t know. I mean, I think that calling the Fed unique is a bit of a cave in actually probably to the financial sector and to the fact that the financial sector really supports an independent Fed that is acting based on economic data and is concerned with inflation. I think that if you have to have a special exception for the Fed, I think that independence is not very high. It is just like the de facto independence is not going to be very high. These people will always be afraid of repercussions… I mean repercussions, they will be afraid of being bullied in the public sphere, they will be afraid of unnamed consequences.
I don’t think, to me… This exception to me is not a solid base for independence. I mean, it’s either that the executive has the ability to fire people or not. And when we discuss this idea, well, it’s based on cause. Again, if you put this into the context of a sliding in the rule of law, cause can be made up, cause can exist out of nothing. We can make up cause. So I don’t see this exception as very solid ground for Fed’s independence. Period.
Matt Grossmann: So you’ve also done research on gender in central banking, and we have some interesting dynamics in the US here where Trump previously served with Janet Yellen and then saw the transition to Jerome Powell and is now fighting with Powell maybe more than he fought with Yellen. On the other hand, he is obviously targeted one of the few women serving on the board for firing. So what can we learn from the literature on gender dynamics that might help us here?
Cristina Bodea: Well, what we know from my and my co-author’s research is that in the job of a central banker, a lot is placed on this individual’s credibility. I mean, many times, to be a good central banker, you have to have a reputation for something, for inflation aversion in this case. And women have a tougher time establishing that reputation. They have a tougher time being believed that they’re going to be tough on inflation. So women get appointed generally less in central banking positions where inflation is a concern. And from our research here in the United States… Just a small parentheses, central banks have been asked to do a lot and they do a lot these days not just doing their job but also communicating with the public.
And rightly so, they want to explain what they do to the broader public and establish sort of a general legitimacy with the broader public. And so we find that when women are trying to do that, reach out to the public, they will generally be less trusted and they will be less trusted on inflation in particular here in the United States. Now, it’s kind of interesting, that President Trump replaced Janet Yellen with J. Powell because Janet Yellen, by all perceptions should have been more pro-high employment and generally pro-lower rates. And he replaced Yellen with Powell. And again, what this kind of shows is that presidents have a lot of power, even with independent central banks, you have the power of appointment, you can pick whoever you want. The question is once you pick them, the independents say, “You should not micromanage them. You should not tell them what to do. They should look at the data and make decisions based on the data.”
And we don’t know how Janet Yellen would have done under the circumstances. I think she would’ve done probably equally well as Jay Powell. I’m not sure whether she would’ve pushed for rising interest rates earlier during the COVID inflation. Again, we don’t know. But from my research, it just feels like it’s easier to target women in this job. And perhaps it is easier to target women who have not worked in the financial sector like Lisa Cook hasn’t. And so again, there may be other factors at play, but from our research, it seems like these are the easier targets, even though the president has targeted J. Powell to a great degree as well. So-
Matt Grossmann: So bad politics often creates good research opportunities. What should researchers be using this opportunity to study and what are you working on that you might want to tell?
Cristina Bodea: So I think it is interesting to study just how… And people do work on this. Just how central banks work within with politics and with other institutions. It is… At least from my research, it is clear that central banks are deeply embedded in politics. They respond to politicians, central bankers understand they’re part of politics and they generally seek to increase the legitimacy of their institution. So one could look at the kinds of efforts that the Fed has done to increase its legitimacy. They understand that they’re a part of the political gain. They want to have clear defenders as well, both… And they do. In the financial sector, but they also want the public to understand that they’re important for how the economy is running this country. And they’re important for ensuring low inflation.
But I’m not working on that. Actually, I’m working on… We have a very new paper with my co-author and colleague, Andrew Kerner, and that is looking at… We’re trying to understand… So a lot of fields have had these revolutionary appointments. In central banking, Janet Yellen was one, Christine Lagarde was one in Europe. And we want to understand how is it that these revolutionary appointments change expectations about who is envisioned as fit for the job and whether people perceive other women working in these fields as more efficacious once you have a role model for them. So that’s kind of the research that I’m doing right now. Clearly, not exactly related to inflation and or independence, but sort of an adjacent track.
Matt Grossmann: There’s a lot more to learn. The Science of Politics is available bi-weekly from the Niskanen Center. And I’m your host, Matt Grossman. If you like this discussion, here are the episodes I recommend next. How bureaucrats deal with political chaos above. Does the Biden economy have bad election timing or an unfair fed? Will a good economy save Trump? Why rising inequality doesn’t stimulate political action. And inflation hurts presidents, and it’s not the media’s fault. Thanks to Cristina Bodea for joining me. Please check out her research and then listen in next time.