Fed's Kugler: Independence 'necessary' to achieve policy goals

Al Drago/Bloomberg

A Federal Reserve official made the case for protecting central bank independence from electoral politics. 

In a speech delivered at an economic conference in Uruguay on Thursday morning, Fed Gov. Adriana Kugler said central banks around the world, including the Fed in the U.S., deliver the best results when they have set goals and broad discretion over how to achieve them.

"It has been widely recognized — and is a finding of economic research — that central bank independence is fundamental to achieving good policy and good economic outcomes," Kugler said, according to a written version of the speech released by the Fed. "It is not sufficient by itself to achieve those goals, but, over time, it is almost always necessary."

Monetary policy

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Kugler's remarks came during the annual meeting of the Latin American and Caribbean Economic Association and the Latin American and Caribbean Chapter of the Econometric Society. She grounded her views in statistical observations and academic conclusions on the relationship between central bank independence and monetary policy results.

"Based on measures of central bank independence, researchers indeed have found a relationship between independence and lower inflation," Kugler said, "especially for advanced economies."

Kugler's remarks come as the Fed's independence from the president is being challenged for the first time in decades. 

Since the 1950s, the Fed has asserted that it has full autonomy in setting monetary policy. Elected officials have, by and large — though with a few notable exceptions — endorsed or at least accepted this view of its independence. The Fed's mandates have evolved since then, as have its transparency obligations, but its ability to adjust policies free of outside intervention has remained in place.

President-elect Donald Trump has called that orthodoxy into question. As a candidate he insisted he should have a "say" in monetary policy decisions. During his first term in the White House, Trump openly criticized Fed Chair Jerome Powell and mused about removing him from office — a proposition that remains legally ambiguous. Reports and statements from those in Trump's orbit suggest he could be willing to go further this time in pursuit of a loyalist Fed chair. 

After the election, Powell was firm that he would not step down if asked by Trump. He also said the administration is "not permitted by law" to fire him without good cause.

Regardless of whether the White House is willing to litigate the matter, Powell's chairmanship expires in May 2026, leaving Trump free to pick a new chair less than a year and a half into his term. He will also have a chance to add a new governor to the board before that, when Kugler's term is up at the end of Jan. 2026.

Kugler's prepared remarks did not delve into the politics of the moment for the Fed. Instead, she focused on the broad history of central banking, from the establishment of the Swedish Riksbank in 1688 through the wave of emerging economies central bank establishments in the 1980s and 1990s. She, like other economists and historians, pinpointed the 1951 Fed-Treasury Accord as the moment the Fed became truly independent — though some policy observers have noted that the informal agreement could be undone quickly by a willing presidential administration. 

Kugler added that, in addition to independence, another key to central bank success is credibility among the population it serves. Maintaining credibility, she said, relies on a commitment to not letting short-term political desires take precedent over long-term price and economic stability.

"The stock of credibility of a central bank will be reflected in long-run inflation expectations moving in a relatively narrow range close to the stated inflation goal," she said. "Conversely, inconsistent actions will imply that agents will update their long-run expectations higher or lower, depending on the direction of surprises in central bank actions, causing de-anchoring of expectations."