Central bankers set policy with incomplete information, unobservable targets, and constant trade-offs between growth, inflation, and employment. In this episode, we delve into how the fight for Federal Reserve independence could impact markets, interest rates, and your financial future.
Topics covered include:
- What Federal Reserve Chair Powell said at the Fed’s annual Jackson Hole Symposium
- What is the Federal Reserve’s mission statement
- Why is it normal for U.S. presidents to disagree with the Federal Reserve’s policy stance?
- Why attacking the Fed’s independence is harmful and could lead to higher interest rates and a weakening dollar
- What causes inflation, and why is it difficult to know the correct level of interest rates
Show Notes
2025 Statement on Longer-Run Goals and Monetary Policy Strategy—The Federal Reserve Board
Trump says U.S. interest rate is at least 3 points too high—Reuters
What is the neutral rate of interest? by Sam Boocker, Michael Ng, and David Wessel—Brookings
Powell’s Econ 101: Jobs not inflation. And forget about the money supply by Howard Schneider—Reuters
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 537. It’s titled “Why Central Banking is So Hard, and Why Fed Independence Matters.”
Jackson Hole Economic Policy Symposium
Last weekend, the Federal Reserve Bank of Kansas City held its annual Jackson Hole Economic Policy Symposium in Wyoming, just over the Teton Mountain Range, where LaPriel and I spend the summers. The skies were clear this year, with minimal wildfire smoke. That’s not the case today, as we’ve been smoked in for the first time this year.
The theme of the symposium was “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy.” Does that sound like an exciting topic? There are actually some papers, fairly interesting, that were presented, so I’ll likely do an episode in the near term on some of the topics, such as labor market mobility, demographic trends, the impact of technology on labor markets. Today, however, I want to discuss why being a central banker is so challenging, and why an independent central bank is critical to smoothly functioning financial markets.
Central bankers make policy decisions with incomplete information. It is a very difficult job. You’re shooting, even though the target’s unobservable, and you’re constantly making trade-offs between how fast is the economy growing, what’s the inflation outlook, and employment.
At the Jackson Hole Symposium, the Federal Reserve Chair Jerome Powell gave his final keynote speech at the event. His term ends in May 2026, and President Trump has announced that Powell will be replaced. He’s also announced a lot of other things about Powell, which I’ll get to.
In 2020, the Federal Reserve undertook a comprehensive review of its policy framework. First time it had done that, and it wants to do it every five years, and that includes revising its statement on longer-run goals and monetary policy strategy. This is the Fed’s mission statement. That statement of longer-run goals and monetary policy strategy was first released in 2012. After they reviewed it and made some adjustments in 2020, we talked about it in episode 312 of the podcast, released in September 2020.
The Federal Reserve’s Mission
Here’s the first sentence of the Fed’s mission statement. “The Federal Open Market Committee is firmly committed to fulfilling its statutory mandate from Congress of promoting, first, maximum employment, second, stable prices, low inflation, and third, moderate long-term interest rates.”
In the next paragraph, they talk about how their job is to explain their policy decisions clearly, specifically their monetary policy decisions, which we’ll describe what monetary policy is here in a moment. But they need to explain these decisions to the public as clearly as possible, because that helps well-informed decision-making by households and businesses, and it reduces economic and financial uncertainty. And it makes their policy, their monetary policy, more effective, because people can see it, they understand it, they can act on it. So there’s that transparency and accountability that they say is essential in a democratic society.
They continue in their statement that employment, inflation, and long-term interest rates, which are the three legs of their congressional mandate—that those things fluctuate over time in response to economic and financial disturbances. And so monetary policy plays an important role in stabilizing the economy in response to those disturbances.
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