Fed Independence Is Sacred... Or So We've Been Told
Authored by Richard Roberts via RealClearMarkets.com,
For the better part of a year, many had become convinced that the Federal Reserve's independence was in its final days.
The narrative rested on two prongs.
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First, an FOMC browbeaten by relentless public attacks, threats of removal, and a Justice Department criminal probe into Chair Jerome Powell. The pressure, many argued, had grown so intense that Fed decisions would no longer be trusted to reflect economics rather than politics.
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Second, a new chair expected to arrive in May 2026, widely projected to be a Trump loyalist, would finish what the pressure campaign had started.
Both prongs have problems.
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On the first, the captured FOMC: the January minutes. Several Fed officials raised the possibility that an interest rate increase might be appropriate if inflation continues tracking above target. Not fewer cuts. A hike. This from a committee supposedly beaten into submission. If the Fed has lost its spine, someone forgot to tell the Fed.
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On the second, the Trump loyalist: the evidence does not support it. After an initial market jolt, analysts largely concluded that nominee Kevin Warsh represented a mainstream, independent choice. Warsh himself has said publicly that independent operations in the conduct of monetary policy are essential. Those who dismissed him as Trump's instrument did so without the kind of evidence they would demand in other contexts. As an aside, while at the Federal Reserve Bank of New York during the Global Financial Crisis, I noted Warsh as a leader who was calm under pressure, analytically sharp, and unwilling to bend to the moment's politics.
So, Fed independence seems on solid ground. The doomsday scenario looks considerably less likely than the headlines suggested.
Which Makes This the Right Moment to Ask an Uncomfortable QuestionIf the battle is not coming, we lose the chance to test empirically what we have long assumed: that a Fed stripped of independence would cause serious and lasting economic harm. That makes the underlying question more urgent, not less. If crisis will not force the examination, intellectual honesty should.
Do we actually have compelling evidence that the Fed must be independent in the first place, or have we simply repeated that claim long enough to mistake consensus for proof?
A moment of relative calm is exactly the right time to ask it honestly.
Correlation Is Not CausationThe story economists tell is clean and confident. Independent central banks produce lower inflation. Political interference leads to time-inconsistency problems: governments prefer cheap money before elections, stoking inflation that becomes ruinously expensive to reverse. When the Fed bent to political pressure under Arthur Burns during the Nixon years, inflation spiraled. A brutal recession was eventually required to bring it back under control. Lesson learned. Independence enshrined.
It is a compelling narrative. But compelling narratives are not robust empirical proof.
The foundational academic work, Alesina and Summers in 1993 and Cukierman's cross-country analysis, found that more independent central banks were associated with lower inflation.
Associated.
Critically, the same research found little evidence that political control had any meaningful impact on growth or unemployment. Countries with stronger institutions tend to have both more independent central banks and better inflation outcomes for reasons that may have little to do with independence itself. After 2000, as inflation fell almost everywhere, the statistical relationship weakened further. The broader literature is not silent, but it is far from conclusive.
Yet the doctrine is treated as settled fact.
A Different WorldThe financial world of 2026 looks nothing like the world those models were built to describe. Capital moves instantly across borders. The dollar anchors global reserves. Inflation is driven as much by supply chains as by domestic money supply. Bond markets discipline policy in real time; the vigilantes are not a 1980s relic, they are embedded in global capital flows.
The case for independence was built on a world that no longer exists. That is not an argument against it. It is an argument for reexamining it.
What Warsh Should DoI have previously written about modernizing inflation measurement, still relying on frameworks that predate the data revolution, and rethinking a regional Fed architecture built for a financial system that no longer exists. The independence doctrine belongs on that same list.
Warsh has an opening here, one he should take before the political noise makes any examination look like capitulation. A serious review would start with the right commission. Not an internal working group, but a balanced body drawing on academic economists, market practitioners, former Fed officials, former members of Congress, and institutional scholars, given one narrow question: is the current independence framework optimally designed for modern conditions?
Then ask the hard questions. Does the empirical evidence support the current degree of independence, or would a more structured accountability framework deliver equivalent outcomes? Are there intermediate models, enhanced transparency requirements, formal congressional review mechanisms, structured communication protocols, that preserve credibility while improving democratic accountability? What can be learned from how peer central banks, the ECB, the Bank of England, the Bank of Japan, structure independence differently?
Then commit to publishing findings with teeth. A review that produces conclusions no one is bound to act on is just theater.
An Honest ReckoningI am not arguing that independence should be abandoned. I am arguing that it should not be treated as beyond question simply because it has been around for decades. The profession prides itself on empirical rigor, and it has applied that standard to almost everything except its own institutional assumptions.
If independence is truly indispensable, honest examination will confirm it. If it needs updating, better to find that out deliberately than in the middle of a crisis.
Sometimes the Fed asks hard questions about everything except itself. Warsh can change that.
Tyler Durden Thu, 02/26/2026 - 08:05
Presidents Putin and Cyril Ramaphosa, via TASS.
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