Thanks, Marco, for sharing your thoughts. Yes, there is a lot of concern about Central Banks' independence in this period, but as I have been thinking more about this, the other side of the coin is accountability. The testimonies at the Congress and publishing minutes and communication more broadly partly address this issue from my point of view. Should we hold Central Bankers to their ability to fulfill their mandate? Over which horizon? What are the consequences if they fail? The so-called Great Moderation has given the impression that Central Banks are powerful in achieving their inflation objective, but I would say that the post-Global Financial Crisis period and the post-pandemic developments are seriously questioning that view and, more broadly, the role of Central Banks.
Thanks Gianluca, you are very right, and you raise a very important point. The narrow and well-defined inflation goal is a key part of central bank independence. But as we have seen, monetary policy ends up having huge consequences on financial stability, capital allocation, growth -- and indirectly, to some extent, on fiscal policy. We have no mechanism to impose formal accountability for all this, and I see no easy way of doing it. Indeed I have been skeptical of central banks taking on additional goals, given their very limited set of instruments.
But sometimes the inflation goals ends up 'hiding' more consequential economic impacts, which in turn endangers central banks' credibility and independence. This should be addressed. Maybe a once-every-ten year formal review of the broader impact of monetary policy, spearheaded by the central bank itself but with the participation of independent academics and leading to an open and transparent public debate?
Yes, there are many dimensions through which the Central Bank's actions influence the economy. I agree, but one way to rephrase my point is: suppose that central banks fail in achieving the inflation goal for n years in a row, having inflation higher/lower than set thresholds, should there be a mechanism to replace them or not?
Ah, ok. But what do you mean by "replace them"? Fire and replace the Chair? The entire decision-making council? (Here an issue is having staggered terms). Or rethinking the set-up and functioning of the institution? (And I assume we'd want to have a margin of error built into the performance criterion, say [target +/- 1pp]?)
Another interesting issue here is multi-year performance vs major one-off mistakes: for example, for me the way the Fed allowed inflation to take off post-Covid was a much greater failure than under or overshooting by half a pp for several years. Your thoughts?
Yes, I would say a multi-year performance with a margin of error built into the performance criterion. The issue you raised, though, is important: who is accountable, the chair, the board members, the voting presidents?
I don't know, to be honest, what would be the best arrangements, but accountability should be openly discussed too. On your last question, I do agree with you that the post-COVID era was a bigger failure than the pre-COVID low-inflation period. But I have been thinking more and more that maybe Central Banks are less powerful than they think in controlling inflation.
Politely disagree. I think the Fed’s independence is now seriously at risk. One reason is that if the Trump administration manages to control the Fed, it opens vast new pastures for rent seeking (using a polite term).
On the Fed’s Covid era performance, I am much less critical than Marco (and others). I interpret the initial phase of Covid as a large negative supply shock that lowered activity and created inflationary pressures. The Fed could have counteracted those inflationary pressures by raising interest rates and QT starting in 2021, but adding a negative demand shock to a negative supply shock is usually not good practice for a central bank with a dual mandate. In any case, the negative supply shock reversed itself while fiscal policy was highly expansionary. The Fed duly started counteracting by raising interest rates and some QT. The end result was a temporary inflation burst (that lowered the public debt-GDP ratio by some 10 percent of GDP), while the real economy was back at equilibrium. It’s best to trace out this macro shock story in a standard AD-AS diagram. 😊 And that might also help understand why the temporary US inflation experience was common across almost all industrial countries independently of their specific fiscal and monetary policies (with Switzerland, as always, the exception). All of this doesn’t mean that one cannot critique central banks for being overly attentive to the wellbeing of the financial sector.
Thanks Albert, and I will politely disagree with your disagreement. One question, and two points:
Question: what do you mean by "if the Trump administration manages to control the Fed"? How do you see this 'capture' happening?
First point: I agree with you that a 'captured' Fed would open new pastures for rent seeking, as you say. I will note this is especially so in light of the Fed's precedent of corporate bonds purchases, established in 2020.
Second point: I think on the Covid experience we need to distinguish two phases. The initial phase, I agree with you, was a large negative supply shock -- governments decided to shut down the economy by decree. Monetary and fiscal expansion was the right response. In 2021, however, the economy was rebounding strongly. Piling up a second round of massive fiscal stimulus was reckless, and accommodating it by continuing QE and keeping rates at zero was inexcusable. Even Mr. 'secular stagnation' Summers immediately predicted it would set off inflation. And four years later, inflation is not yet back to target. As for the fact that the inflation experience was common to almost all industrial countries, well, they were almost all of them running the same extremely loose monetary and fiscal policies.
Marco, there are plenty of autocratic playbooks on how to “control a central bank,” and the Trump administration is clearly studying these playbooks. No need to provide technical assistance tips on this. But I admire your steadfast belief that such infelicitous things can’t happen here. On the Covid inflation experience, papers I have seen suggest that the size of the inflation surge was correlated with the size of fiscal stimulus, while monetary policies were less of a factor. Moreover, if you believe that the inflation surge was only caused by positive demand shocks, you will have a hard time explaining why there was a quick “immaculate disinflation.” The supply + demand shock story does a decent job at this, as far as I can see.
1. I did not say that supply shocks did not play a role. I said that expansionary fiscal and monetary policies were maintained well before and beyond what was needed, and this played a role in both the size and the duration of the inflation shock.
2. Since the Trump administration is already studying how to take control of the Fed and does not need technical assistance, indulge me: how do you think it would happen here?
Marco, I generally agree that we are working ourselves up into an excessive froth over these appointments. But I would say the appointment of White House aides like Kevin Hassett and Stephen Miran would raise eyebrows and, over time,
Thanks Christopher. I fully agree on Miran, less so on Hassett. I also suspect the long-term trend in the risk premium will be driven more by fiscal policy, and disentangling the effect of a single Fed Board appointment will be hard. But your comment also highlights something important: while we should not get too excited about a single appointment, "personnel IS policy," and the overall quality of Fed appointees matters a lot -- they have an important and delicate job. On this I think you and I agree completely. And as you note, poor personnel choices (on both monetary and fiscal policy) over time will make borrowing more expensive.
I might sound somewhat iconoclastic — maybe even odd — but here is my view.
In today’s economy, propelled by intense financialisation, the claimed independence of central banks warrants careful examination.
Over the past twenty years, the Federal Reserve — along with other Western central banks — has demonstrated a concerning level of obedience (one might also say: 'agency') to a business model that is largely responsible for the systemic imbalances we now face.
Conceptually, central bank independence from government (upstream independence) is sound. However, independence must cut both ways — upstream and downstream. That hasn’t been the case. Central banks have demonstrated a clear willingness to accommodate the financial sector, shaping monetary policy to serve its interests. The consequence has been complacency in managing money supply and the inflation of distorted economic models — such as the VC and PE mindset that tolerates being wrong 99% of the time as long as the 1% is a unicorn.
By suppressing recessions — which, though unpleasant, act as vital mechanisms for economic correction — central banks have undermined essential feedback loops. This has driven both economic dysfunction and social inequality. The Fed hasn’t merely permitted these trends — it has validated them.
So yes, I believe in central bank independence — but only if it's symmetrical. At present, Fed officials bristle at upstream pressure, yet happily accommodate downstream demands from the very markets they should be tempering. That’s not independence — it’s complicity.
I understand it’s controversial to question central bank independence. But before the Fed protests against government pressure, it should take a long, hard look inward. There are undoubtedly brilliant minds within those institutions — now would be a good time to act with intellectual honesty, and to redefine independence as a matter of equanimity in both directions.
Otherwise, why have a central bank at all? If we are going to let markets dictate everything, we might as well allow businesses to print money too (not far from the truth, currently). The system is already in chaos — one more absurdity won’t make much of a difference.
Excellent point. What you are highlighting, in essence, is the dominance that the financial sector has taken in our modern economy -- with the complicity, as you say, of central banks. This endows private finance with awesome implicit blackmail power. The fear that a sharp drop in the values of financial assets might cause a recession leads central banks, especially the Fed, to provide a reliable put option, easing policy to support asset values, even when they appear inflated. This is especially true for the Fed -- the ECB has different issues, such as managing the spreads between different member countries.
You and I have spoken about this before, but maybe the issue is not just the balance between upstream and downstream independence for central banks, but also the balance between Main Street and Wall Street.
Thanks, Marco, for sharing your thoughts. Yes, there is a lot of concern about Central Banks' independence in this period, but as I have been thinking more about this, the other side of the coin is accountability. The testimonies at the Congress and publishing minutes and communication more broadly partly address this issue from my point of view. Should we hold Central Bankers to their ability to fulfill their mandate? Over which horizon? What are the consequences if they fail? The so-called Great Moderation has given the impression that Central Banks are powerful in achieving their inflation objective, but I would say that the post-Global Financial Crisis period and the post-pandemic developments are seriously questioning that view and, more broadly, the role of Central Banks.
Thanks Gianluca, you are very right, and you raise a very important point. The narrow and well-defined inflation goal is a key part of central bank independence. But as we have seen, monetary policy ends up having huge consequences on financial stability, capital allocation, growth -- and indirectly, to some extent, on fiscal policy. We have no mechanism to impose formal accountability for all this, and I see no easy way of doing it. Indeed I have been skeptical of central banks taking on additional goals, given their very limited set of instruments.
But sometimes the inflation goals ends up 'hiding' more consequential economic impacts, which in turn endangers central banks' credibility and independence. This should be addressed. Maybe a once-every-ten year formal review of the broader impact of monetary policy, spearheaded by the central bank itself but with the participation of independent academics and leading to an open and transparent public debate?
Yes, there are many dimensions through which the Central Bank's actions influence the economy. I agree, but one way to rephrase my point is: suppose that central banks fail in achieving the inflation goal for n years in a row, having inflation higher/lower than set thresholds, should there be a mechanism to replace them or not?
Ah, ok. But what do you mean by "replace them"? Fire and replace the Chair? The entire decision-making council? (Here an issue is having staggered terms). Or rethinking the set-up and functioning of the institution? (And I assume we'd want to have a margin of error built into the performance criterion, say [target +/- 1pp]?)
Another interesting issue here is multi-year performance vs major one-off mistakes: for example, for me the way the Fed allowed inflation to take off post-Covid was a much greater failure than under or overshooting by half a pp for several years. Your thoughts?
Yes, I would say a multi-year performance with a margin of error built into the performance criterion. The issue you raised, though, is important: who is accountable, the chair, the board members, the voting presidents?
I don't know, to be honest, what would be the best arrangements, but accountability should be openly discussed too. On your last question, I do agree with you that the post-COVID era was a bigger failure than the pre-COVID low-inflation period. But I have been thinking more and more that maybe Central Banks are less powerful than they think in controlling inflation.
Politely disagree. I think the Fed’s independence is now seriously at risk. One reason is that if the Trump administration manages to control the Fed, it opens vast new pastures for rent seeking (using a polite term).
On the Fed’s Covid era performance, I am much less critical than Marco (and others). I interpret the initial phase of Covid as a large negative supply shock that lowered activity and created inflationary pressures. The Fed could have counteracted those inflationary pressures by raising interest rates and QT starting in 2021, but adding a negative demand shock to a negative supply shock is usually not good practice for a central bank with a dual mandate. In any case, the negative supply shock reversed itself while fiscal policy was highly expansionary. The Fed duly started counteracting by raising interest rates and some QT. The end result was a temporary inflation burst (that lowered the public debt-GDP ratio by some 10 percent of GDP), while the real economy was back at equilibrium. It’s best to trace out this macro shock story in a standard AD-AS diagram. 😊 And that might also help understand why the temporary US inflation experience was common across almost all industrial countries independently of their specific fiscal and monetary policies (with Switzerland, as always, the exception). All of this doesn’t mean that one cannot critique central banks for being overly attentive to the wellbeing of the financial sector.
Thanks Albert, and I will politely disagree with your disagreement. One question, and two points:
Question: what do you mean by "if the Trump administration manages to control the Fed"? How do you see this 'capture' happening?
First point: I agree with you that a 'captured' Fed would open new pastures for rent seeking, as you say. I will note this is especially so in light of the Fed's precedent of corporate bonds purchases, established in 2020.
Second point: I think on the Covid experience we need to distinguish two phases. The initial phase, I agree with you, was a large negative supply shock -- governments decided to shut down the economy by decree. Monetary and fiscal expansion was the right response. In 2021, however, the economy was rebounding strongly. Piling up a second round of massive fiscal stimulus was reckless, and accommodating it by continuing QE and keeping rates at zero was inexcusable. Even Mr. 'secular stagnation' Summers immediately predicted it would set off inflation. And four years later, inflation is not yet back to target. As for the fact that the inflation experience was common to almost all industrial countries, well, they were almost all of them running the same extremely loose monetary and fiscal policies.
Marco, there are plenty of autocratic playbooks on how to “control a central bank,” and the Trump administration is clearly studying these playbooks. No need to provide technical assistance tips on this. But I admire your steadfast belief that such infelicitous things can’t happen here. On the Covid inflation experience, papers I have seen suggest that the size of the inflation surge was correlated with the size of fiscal stimulus, while monetary policies were less of a factor. Moreover, if you believe that the inflation surge was only caused by positive demand shocks, you will have a hard time explaining why there was a quick “immaculate disinflation.” The supply + demand shock story does a decent job at this, as far as I can see.
Albert,
1. I did not say that supply shocks did not play a role. I said that expansionary fiscal and monetary policies were maintained well before and beyond what was needed, and this played a role in both the size and the duration of the inflation shock.
2. Since the Trump administration is already studying how to take control of the Fed and does not need technical assistance, indulge me: how do you think it would happen here?
Marco, I generally agree that we are working ourselves up into an excessive froth over these appointments. But I would say the appointment of White House aides like Kevin Hassett and Stephen Miran would raise eyebrows and, over time,
the risk premium in the long-term.
Thanks Christopher. I fully agree on Miran, less so on Hassett. I also suspect the long-term trend in the risk premium will be driven more by fiscal policy, and disentangling the effect of a single Fed Board appointment will be hard. But your comment also highlights something important: while we should not get too excited about a single appointment, "personnel IS policy," and the overall quality of Fed appointees matters a lot -- they have an important and delicate job. On this I think you and I agree completely. And as you note, poor personnel choices (on both monetary and fiscal policy) over time will make borrowing more expensive.
I agree with you completely. Executive shouldn’t mess with Feds on monetary policies.
I might sound somewhat iconoclastic — maybe even odd — but here is my view.
In today’s economy, propelled by intense financialisation, the claimed independence of central banks warrants careful examination.
Over the past twenty years, the Federal Reserve — along with other Western central banks — has demonstrated a concerning level of obedience (one might also say: 'agency') to a business model that is largely responsible for the systemic imbalances we now face.
Conceptually, central bank independence from government (upstream independence) is sound. However, independence must cut both ways — upstream and downstream. That hasn’t been the case. Central banks have demonstrated a clear willingness to accommodate the financial sector, shaping monetary policy to serve its interests. The consequence has been complacency in managing money supply and the inflation of distorted economic models — such as the VC and PE mindset that tolerates being wrong 99% of the time as long as the 1% is a unicorn.
By suppressing recessions — which, though unpleasant, act as vital mechanisms for economic correction — central banks have undermined essential feedback loops. This has driven both economic dysfunction and social inequality. The Fed hasn’t merely permitted these trends — it has validated them.
So yes, I believe in central bank independence — but only if it's symmetrical. At present, Fed officials bristle at upstream pressure, yet happily accommodate downstream demands from the very markets they should be tempering. That’s not independence — it’s complicity.
I understand it’s controversial to question central bank independence. But before the Fed protests against government pressure, it should take a long, hard look inward. There are undoubtedly brilliant minds within those institutions — now would be a good time to act with intellectual honesty, and to redefine independence as a matter of equanimity in both directions.
Otherwise, why have a central bank at all? If we are going to let markets dictate everything, we might as well allow businesses to print money too (not far from the truth, currently). The system is already in chaos — one more absurdity won’t make much of a difference.
Excellent point. What you are highlighting, in essence, is the dominance that the financial sector has taken in our modern economy -- with the complicity, as you say, of central banks. This endows private finance with awesome implicit blackmail power. The fear that a sharp drop in the values of financial assets might cause a recession leads central banks, especially the Fed, to provide a reliable put option, easing policy to support asset values, even when they appear inflated. This is especially true for the Fed -- the ECB has different issues, such as managing the spreads between different member countries.
You and I have spoken about this before, but maybe the issue is not just the balance between upstream and downstream independence for central banks, but also the balance between Main Street and Wall Street.