Ben Bernanke and Janet Yellen: The Fed Must Be Independent

Opinion|Ben Bernanke and Janet Yellen: The Fed Must Be Independent

As former chairs of the Federal Reserve, we know from our experiences and our reading of history that the ability of the central bank to act independently is essential for its effective stewardship of the economy. Recent attempts to compromise that independence, including the president’s demands for a radical reduction in interest rates and his threats to fire its chair, Jerome Powell, if the Fed does not comply, risk lasting and serious economic harm. They undermine not only Mr. Powell but also all future chairs and, indeed, the credibility of the central bank itself.

Independence for the Federal Reserve to set interest rates does not imply a lack of democratic accountability. Congress has set in law the goals that the Fed must aim to achieve — maximum employment and stable prices — and Fed leaders report regularly to congressional committees on their progress toward those goals. Rather, independence means that monetary policymakers are permitted to use fact-based analysis and their best professional judgment in determining how best to reach their mandated goals, without regard to short-term political pressures.

Of course, Fed policymakers, being human, make mistakes. But an overwhelming amount of evidence, drawn from the experiences of both the United States and other countries, has shown that keeping politics out of monetary policy decisions leads to better economic outcomes.

A particularly clear lesson of history is that when central banks are forced to finance government deficits — by keeping interest rates excessively low, to cite one possibility — the result is inevitably higher inflation and economic damage. We’ve seen this scenario many times, including in the United States. During and for some years after World War II, the Fed was pressured by the Treasury to cap interest rates to help finance war debt. That policy led to a burst of double-digit inflation by the late 1940s. Fed policymakers rebelled, and in 1951 the Fed and the Treasury reached an accord to separate government debt management from monetary policy, which in turn freed the Fed to fight inflation.

That episode, and many like it around the world, underscores a fundamental truth: If investors and the public see that monetary policy is being used to facilitate government borrowing, they lose confidence that inflation will stay low. As a result, regular savers and investors in U.S. debt demand higher interest rates to compensate for the likely erosion of their capital. Ironically, forcing monetary policy to help finance deficits actually drives up borrowing costs for everyone, including home buyers and businesses, as well as the government.

Central bank independence also helps remove electoral politics, which tends to be focused on the very short run, from monetary policy decision making. President Richard Nixon pressured the Fed chair, Arthur Burns, to keep rates low ahead of the 1972 election to provide a short-term economic boost. The result, however, was stagflation — high inflation with weak growth. That experience has haunted central bankers ever since. Stagflation plagued the U.S. economy for years until Paul Volcker, another Fed chair, refocused the bank on reducing inflation in the early 1980s. Mr. Volcker’s monetary tightening led to a painful recession, but it restored the credibility that is essential to keeping inflation in check.