Whose Fed?

For the past twenty years, central banks have rarely been out of the news. Called upon to stabilize the global financial system when it appeared at risk of collapse during the financial crisis of 2008–2009, the Federal Reserve and its international peers remained in firefighting mode until the mid-2010s, using all the weapons in their arsenal to stimulate economic activity. After a brief respite, the world’s central banks returned to the fore during the coronavirus pandemic of 2020–2021, again being relied on to keep credit flowing and the economy off life support. And no sooner had the virus begun to loosen its grip than central banks were forced to contend with the resurgence of a phenomenon that many commentators appeared to think had been consigned to history, at least in the rich global north: inflation. A surge in retail prices from mid 2021 saw the Fed and other central banks hike interest rates to levels higher than they had been since before the financial crisis. There, more or less, they remain today.

It’s against this backdrop that Donald Trump returned to the White House in January. Nothing if not sensitive to the flow of the American economy, Trump has been keen for the Fed to aggressively lower interest rates now that inflation has eased. As he sees it, this would help sustain the economy’s steady expansion over the past two years, which has arguably been jeopardized by the tariffs that he himself introduced. But thus far the Fed has refused to play ball: it has held rates steady during 2025, having begun cautiously to reduce them last year. This has incensed Trump, who declared that the Fed chair Jerome Powell—“always TOO LATE AND WRONG” with rate policy—can’t leave office “fast enough.” He has repeatedly threatened to fire Powell, but for the moment has retreated: “I would remove him in a heartbeat,” he told Newsmax at the start of this month, “but they say it would disturb the market.” 

As early as February, Trump signed an executive order—number 14215—designed to increase presidential management of a range of federal agencies, the Fed among them. Specifically, the order imposes greater White House control over several of the Fed’s regulatory duties, including its supervision of private banks. What it does not encroach upon is the Fed’s prized autonomy in setting interest rates, which, for now at least, remains intact.

This, then, seems an especially opportune moment to ask: Are central banks like the Fed really independent in the first place? If so, of what and whom? And what goals are they “independently” pursuing?

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The world’s first central banks came into existence in the late seventeenth century—Sweden’s Riksbank, established in 1668, was the pioneer; the Bank of England, often considered the model for modern central banks, followed in 1694. These and other early central banks represented what the sociologist Leon Wansleben, in his 2023 book The Rise of Central Banks, describes as “institutional settlements” between two parties.¹ On one side was the state. On the other was the fraction of the emergent capitalist class that controlled credit provision: that is, the fledgling private banking sector.

Each realized that the other could provide something crucial. The state valued the evident power of private banks to raise credit to generate economic growth, not to mention to finance wars. (It was hardly an accident that central banks came into being partly as instruments of war financing; the Bank of England was created explicitly to help fund the Nine Years’ War against France.) Meanwhile, private banks valued the power of the state to instill confidence and trust in money at more than the very local scale. Created, then, for the mutual benefit of governments and financiers, central banks evolved, Wansleben explains, “to regulate their various interdependencies.”

Not the least of these were interdependencies among different types of currency. Seventeenth-century Europe was characterized by an abundance of overlapping state and private monies, ranging from coins issued by sovereigns and city-states to notes issued by banks and bills of exchange issued by trading houses. The eventual consolidation of these monies into a single legal tender at the scale of the nation-state was one of the pivotal achievements of the early central banks, which were granted the privilege of a monopoly on issuance of that currency. Historians of money often contend that the Bank of England, rather than the Riksbank, provided the blueprint for central banking proper, partly because the Bank of England was the first to achieve this historic consolidation—widely considered a central moment in the history of capitalism.

Today, though their exact duties vary from country to country, central banks have a range of responsibilities. Most of these are explicitly “monetary” or “financial.” A common one is to ensure financial stability by regulating and supervising private banks (with a view to preventing bank failures and protecting customer deposits), monitoring systemic financial risks—including, increasingly, risks relating to climate change—and acting as a lender of last resort during financial crises. Others are to ensure the smooth and secure functioning of systems of interbank payment, clearing, and settlement, and to maintain reserves of financial assets that are considered systemically significant, such as gold and certain foreign currencies. But some responsibilities extend beyond “finance” per se. Many central banks are tasked with promoting high levels of employment; some are expected to provide policymakers with economic analysis, projections, and advice.

But one responsibility has long loomed above all others: maintaining price stability, and thereby monetary stability. What this means, in the most general terms, is to minimize fluctuations in the prices of goods. The twin enemies of price stability are inflation (which discourages investment and saving—why put money away now if it won’t buy you as much later?) and deflation (which discourages spending and borrowing—why buy now if prices are going down, or take out a loan if the value of money is increasing?). Price stability is monetary stability for the simple reason that prices are expressed in monetary terms; a rise in prices represents by definition a devaluation of money’s purchasing power.

The importance of price stability became savagely apparent in the first half of the twentieth century. Between the 1910s and the 1930s much of the capitalist world was wracked by periods of rampant inflation, deflation, or in some cases one after the other. Severe monetary and economic disorder, moreover, all too easily spilled over into social and political disorder and ultimately war, the most infamous example being hyperinflation and attendant social unrest and political radicalization in Weimar Germany. The social and political perils of monetary instability were arguably the single most important message conveyed by the leading economists of the age, notably John Maynard Keynes in Britain and Irving Fisher in the US, and they have shaped the principles and practice of central banking ever since.

During World War II the Fed was tasked with keeping interest rates—and thus the government’s war financing costs—low. This continued after the end of hostilities. When inflation surged in the immediate postwar era, Fed officials blamed the low rates, leading to growing conflict between the Fed and the government. Only in 1951, with an agreement that became known as the Treasury-Fed Accord, was the Fed relieved of its obligation to suppress interest rates. The 1951 Accord is widely considered the birth of Fed independence. The basic rationale for central bank independence most commonly articulated by its advocates was, and remains, that money (and its price) is a technocratic matter best left to technocrats; central bankers need to be able to make decisions about interest rates free of meddlesome politicians, who are liable to try to bend monetary policy for political gain.

But Fed independence was not formalized in legislation, and the White House and Treasury would continue periodically to apply pressure on rate-setters (ordinarily to keep rates low), as most notably Richard Nixon did ahead of the 1972 election. Not until the following decade was the Fed’s reputation for actual independence cemented: famously, at the beginning of the 1980s, Fed chair Paul Volcker raised interest rates to well in excess of 10 percent and kept them there until inflation had been crushed, in the face of both angry public protests and intense political pressure from a bipartisan Congress to change course.

The Fed has been considered genuinely independent ever since, even as that independence is still not constitutionally or legislatively enshrined, remaining mostly a political convention. As in other countries with “independent” central banks, the government gives the Fed its mandate, and the president nominates the members of the Fed’s governing board, including its chair, none of whom can be legally removed without cause. But the Fed effects policy on its own: independent within the government, if not independent of it.

For the better part of half a century the Fed has been expected to adhere to the “dual mandate”—keeping prices stable and seeking maximum employment­—that Congress gave it in 1977 amid the country’s ongoing battle with the rare combination of high inflation and high unemployment (“stagflation”). But in practice it invariably prioritizes price stability. The same is true for the Bank of England, which has been charged since 1998 with supporting the government’s economic policy, including its objectives for growth and employment, but only as long as supporting government policy does not threaten price stability. Meanwhile, for many of the modern era’s other leading central banks, including the European Central Bank and the Bank of Japan, maintaining price stability is the solitary official mandate.

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What do today’s central banks understand by “price stability,” and how do they endeavor to achieve it? The aim is not constant prices, which is to say zero inflation. For one thing, to target price constancy would be to flirt with deflation, which central bankers typically consider a greater evil than inflation—they like to have the option of a little inflation, for a short period, to kickstart economic activity during economic downturns (so-called pump-priming). For another, price constancy is too precise a target to hit consistently. To central bankers, credibility is sacrosanct: if they fail to achieve their goals, their credibility is at risk, and it would be effectively impossible for them to always achieve zero inflation. Instead, then, more or less all central banks target inflation of around 2 percent. This has been the norm since the 1990s.

As to how this low inflation is to be achieved, practices have changed considerably over time. In the late 1970s and early 1980s “monetarism” was briefly in fashion. Because central banks have a monopoly on issuing currency, the logic went, they can keep prices stable by ensuring that changes in the money supply match changes in the supply of goods and services available for that money to purchase. Easy! But monetarism failed. There were many reasons for this, perhaps the most significant of which was that central banks are not the only banks that create money. When they make loans, private banks do too—not in the form of new physical currency, but in the form of new deposits, which augment a nation’s money supply as a whole. Central banks, as we shall see, have some indirect control over the pace and scale of such private money creation, but only some.

To hit inflation targets, central banks therefore rely on a range of “interest rate operating procedures.” If the economy is running hot and prices are rising too fast, interest rates are raised to cool things down by making borrowing more expensive, thus subduing both economic production and consumption. Conversely, when the economy is cold, rates can be lowered to help stimulate borrowing.

Though the premise is straightforward, the procedures are anything but. To begin with, what do we even mean by “interest rates”? Contemporary capitalist economies feature countless types of interest-bearing credit instruments—short- and long-term, tradeable and non-tradeable, fixed and variable, and so on—all of which have their own interest rates. Which particular rates do central banks attempt to manipulate in their quest to fashion price stability, and what power do they have to do so?

The banks have two main methods. The first involves setting an actual interest rate, over which they have administrative control. Typically this rate is the one that applies when a private bank, unable to borrow from other private banks, borrows from the central bank, for instance to meet any reserve requirements—that is, an amount of money it must hold in reserve to enable it to meet its deposit liabilities, rather than lend or invest. This central bank–set rate is termed the “discount rate” in the US and the “bank rate” in the UK (though they are not functionally equivalent). Acting in this way as the “bankers’ bank,” central banks are able to wield a certain influence over interest rates established in the market, which are the rates they ultimately care about.

Second, they can achieve further influence, especially over longer-term interest rates, by engaging in so-called open-market operations, actively participating in markets by buying and selling financial assets, especially government debt such as US Treasuries. The premise is that market interest rates can be affected by manipulating the cash reserves held by private banks. If, say, a central bank buys government bonds from private banks, this increases those banks’ reserves and, in theory at least, encourages them to lend more, thereby increasing the supply of credit money and decreasing its price, namely the interest rate. As it happens, this was broadly what many of the world’s leading central banks did, and on an enormous scale, during and after the financial crisis and then again during Covid-19—garnering the label “quantitative easing.”

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Independence from the state has long been a preeminent concern of commentators on modern central banking. But we hear considerably less about independence from the other party to the historic central-banking bargain, namely finance capital. Why is it that the one is today considered a legitimate locus of political concern, but not the other?

If we return to the annals of early central banking, it becomes clear that there was actually much more reason to be concerned about such banks’ relationship with private bankers than with policymakers. After all, the trailblazing Bank of England, as the economist John Kenneth Galbraith reminded us in his book Money (1975), was originally a profit-seeking private enterprise, founded and capitalized by private investors, “the instrument of a ruling class. Among the powers the Bank derived from that ruling class was that of inflicting hardship. It could lower prices and wages, increase unemployment.” The Bank remained a private enterprise for more than a quarter of a millennium.

Many critics on the left argue that the relationship of private finance with central banks is almost as close today as it was in the early days of the Bank of England. Central banks and private financial firms exist within the same institutional ecosystem. With very few exceptions, central bankers, as the political economist Geoff Mann has noted, “come to monetary policy work from the financial sector.”² Furthermore, central bank officials rely on the finance sector for information and advice, while governments rely in turn on the finance sector’s monitoring of central bank activity and personnel in undertaking their evaluations of central bank policy: both forms of reliance afford the finance sector significant leverage.

Appreciating their close relationship with private financial firms helps us to understand why the Fed and other central banks put such a high priority on constraining inflation, at the expense of other possible goals. To the extent that inflation and unemployment are inversely related (the premise of an economic model called the Phillips Curve), studies have found that the working class is more likely to prioritize policies combating unemployment rather than inflation, as the economist Arjun Jayadev points out.³ It is among private financial institutions and their wealthy patrons that relative inflation aversion is consistently found to be highest. One study in the UK, for example, found that the greater a surveyed individual’s total savings and investments, the more relatively averse to inflation they were. Those coming to a career in central banking from a background in private finance bring their above-average inflation aversion with them and act on it. Studies have shown that hailing from such a background increases the likelihood of central-banker support for anti-inflationary interest-rate policy.⁴

The overriding objective of wealthy individuals in general and members of the private finance sector in particular is to preserve the value of their assets. Inflation directly imperils the preservation of this existing wealth. This is partly because it reduces that wealth’s purchasing power, but it is also because wealthy individuals and institutions are typically net creditors, and inflation is a form of redistribution away from creditors insofar as it means that debts are repaid with money of lower purchasing power. As such, the paramount policy principle of private finance is always and everywhere to fight inflation.

Of course, there are good reasons, as history has amply shown, for more or less everyone to be wary, even fearful, of inflation. What is distinctive about the inflation aversion of bankers and the rich is how unconditional it tends to be. Other crucial interest groups in society are generally more ambivalent about inflation, which can have a complex impact on them. Inflation damages workers’ incomes if wage rises don’t keep pace, but lower-income people, in addition to generally prioritizing combatting unemployment over inflation, may, for example, welcome inflation’s effect on eroding the value of household debt, which in relative terms they disproportionately bear.

Governments can be ambivalent about inflation, too, especially in this day and age when so many of them, in rich nations as well as poor ones, are grappling with enormous public debts. In fact, there are those—certain public-choice theorists, mainstream economists, and financiers prominent among them—who are convinced that elected governments have an inherent “inflationary bias.” Among the purported reasons for this are that governments want to inflate away public debt and that they tend to pursue policies that are popular in the short term but often inflationary in the long term, including increasing government spending, reducing unemployment, and indeed (where government has retained control of monetary policy) cutting interest rates.

To be sure, hyperinflation is ruinous. But is inflation of around 2 percent really preferable to inflation of, say, 3, 4, or even 5 percent? As the political scientist Jonathan Kirshner has observed, the social and economic costs of interest-rate policies that are “a little too loose” (that is, accommodating of inflation moderately in excess of 2 percent) actually remain “unclear,” but “the costs from macroeconomic policies that are a little too tight are unambiguous,” especially high unemployment and stunted growth.⁵ Much better in the round, Kirshner and many others suggest, is to err on the side of lower rather than higher interest rates and more rather than less inflation. This had been Keynes’s sense, too.

It is hardly surprising, then, that the finance sector has emerged as the staunchest defender of the Fed’s independence in response to Trump’s recent threats. “With respect to monetary policy…central bank independence, Fed independence, is very important and it’s something we should fight to preserve,” David Solomon, the CEO of Goldman Sachs, recently said to CNBC. “I think central bank independence—not just here in the United States but around the world—has served us incredibly well.” Who, one can’t help but wonder, is the “us” he had in mind?

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The greatest trick that the finance sector ever pulled was convincing the world that money was somehow “neutral,” best managed by “independent” technocrats with—as the onetime Fed vice-chair Alan S. Blinder memorably put it—“thick insulation from the hurly-burly of politics.” The neutrality of money, the idea that, at least in the long run, the processes and outcomes of the “real economy” are determined solely by “real,” nonmonetary factors, is a conceptual mainstay of orthodox financial economics.

The truth, however, is that in the real world nothing is less neutral than money, nothing more material to who gets what and why, and thus nothing more fundamentally political in nature. “Those who wield power control money,” declared the text of the 1980 Arusha Initiative, a call by developing countries for reforming international monetary policy and finance. “Those who manage and control money wield power.” Or, as Marx wrote, “the power which each individual exercises over the activity of others…exists in him as the owner…of money.” It is hard, therefore, to imagine any realm where it would be more imperative to subject decision-making to representative democratic oversight and deliberation than monetary policy.

The idea that money can and should be managed beyond the sphere of democratic deliberation is an especially odd and jarring one in the American context. As Galbraith observed in Money, money dominated American political life for much of the first century and a half of the Republic: “Only the politics of slavery would divide men more angrily than the politics of money.” When Galbraith was writing, in the 1970s, the idea that money was not in fact political was relatively novel, and it was clear to him that this premise was thoroughly ideological. “Nothing is so attractive to the individual of conservative instinct,” he averred, “as the thought that economic policy is a purely technical matter. No questions of social class or social policy are involved.” This, as Galbraith saw it, was hogwash: “Monetary and economic management are inextricably a part of the larger problem of income distribution in the modern economy.”

None of this is to say that Fed independence in its current form does not have merits. To highlight the political nature of money and the fact that rate-setting occurs in institutional settings saturated in relations of power, belying any notion of strict “independence,” is not to argue that elected governments should simply assert direct control over monetary policy, in the US or anywhere else. Rather, it is to say that monetary policy should be subject to much more vigorous and open public debate, and that this should be accompanied by some form of democratic accountability for central banks. The challenge, as the political theorist Leah Downey writes in her new book, Our Money, is to “accept that monetary policy is complex and technical and requires expertise without concluding it is either too important or too complex for democratic politics.”⁶

How to hold central banks accountable to democratic politics is an open question. (For Downey it would, among other things, mean “empowering democratic legislatures to manage monetary policy more actively,” although she acknowledges that any such shift would need to go hand-in-hand with “strengthening the democratic character of modern legislatures” themselves.) Donald Trump, needless to say, does not want to open up monetary policy to the sphere of democratic deliberation. He wants the interest-rate setters at the Fed to dance to his tune, and right now his tune is lower interest rates—in order, he has said, to reduce mortgage costs and government financing costs, and because he believes it would give a politically beneficial boost to growth. But he has, in his own perverse and self-interested fashion, managed to draw our attention to the political status of money and its management. Now, then, seems an especially good time to stress that the task at hand is not just to ward off his more nefarious designs on the Fed but to reassess what central banks owe, and to whom.