The Federal Reserve’s independence is paramount, especially when the economy faces new and untested challenging times, according to Peter Conti-Brown, Wharton professor of legal studies and business ethics. “Right now, we’re seeing the Fed have to make some calls and decisions about some hard challenges,” Conti-Brown said in an interview with Wharton Business Daily. (Listen to the podcast.) Those challenges include the threats of rising inflation and a recession, triggered by higher import tariffs across trading partners.

“In the face of changing circumstances, [the Fed will] need to do new things,” Conti-Brown said. “And in order to do new things — like we saw in 2008 (after the Great Financial Crisis), after COVID-19, and many other instances — [the Fed] requires political cover.”

A long-time Fed historian, Conti-Brown has a new book he has co-authored with Sean H. Vanatta, Private Finance, Public Power: The History of Bank Supervision in America, slated for release on June 24. He also wrote the 2016 book The Power and Independence of the Federal Reserve. In his interview with Wharton Business Daily, he explained the context for the current attention on the Fed’s autonomy and explored how it may move forward.

Below are edited highlights from his interview:

Why the Fed’s Independence Is in Focus Now

Conti-Brown: We never stopped focusing on it, and for good reason. The Federal Reserve has been endowed with extraordinary powers over our economy and through the economy, our society [as well]. It’s right for us as citizens and for the politicians we elect to hold the Fed to account and to be curious and even sometimes skeptical of the Fed’s powers. That’s called democratic accountability.

But we don’t want to destroy what makes the Federal Reserve so important, and that is its insulation from the 24-hour news cycle or the whims of any president, Republican or Democrat. That insulation means that monetary policy and economic policy don’t become a loyalty test to any one individual, which will create bad policy. So, we never stop focusing on it, because we’re always trying to get that line right on democratic accountability, which is good, without eroding technocratic expertise, which is also good.

Fed Independence Over the Years

Conti-Brown: History has given us lots of examples, good and bad, about how this has worked. At the beginning, in 1913, it wasn’t called “independence” at the time; it was more about letting bankers be bankers. The idea is that bankers know best and so they’ll know how to manage the economy in the interests of essentially profit maximization and loss minimization to the banks themselves. Those banks are the Federal Reserve banks.

But that kind of “independence” led to the Great Depression [of 1929]. That’s overstating it just a little bit, but Federal Reserve bankers acting in the interests of their shareholders are what made the Great Depression “great.” They just did too little of the kind of central banking that we’d want to see in a major deflationary downturn.

Today, central bankers don’t think of themselves as bankers, per se. They think of themselves as government technocrats. What we have learned over many decades of experience is that when we let those experts keep their eye on the medium term, then they’re going to create policy that’s better for all of us. Not perfect — we’ve seen some errors coming out of central banks in the last few years.

“You can’t have experimental central bankers who are simultaneously managing a battle with the sitting president.”— Peter Conti-Brown

The Alternative to Independent Central Banking

Conti-Brown: No one’s claiming that central bankers are going to be perfect at their jobs. What we’re saying is that they’re going to be better than the alternative. The alternative is setting interest rate policy from the Oval Office, according to the whims of whatever the president wants to see that day. That’s the main alternative to central banking. And that’s what’s under threat today.

The Federal Reserve represents a separate power center to President Trump. It’s something that he’s not controlling. We’ve seen his reactions to other kinds of separate power centers in the media, the judiciary, the military, and in Congress and universities.

We see it in central banks, too. There is bipartisan enthusiasm from presidents going back to Woodrow Wilson (1913-1921) in almost a steady through line until Donald Trump of being extremely impatient with the Fed. That’s part of the job. It’s almost like when the president takes his oath of office, there’s an asterisk that says: “Also always be wondering if the Fed is going to be in your interests.” The difference is what you do about it. And there, President Trump has shown himself to really vent his spleen on social media against the Federal Reserve.

The key point here is that there are consequences to this. Those are the consequences that that worry me the most, because so much about Fed independence is about norms and conventions. These [social media posts] undermine that independence in exactly that way.

On Social Media Posts Influencing the Fed’s Next Rate Decision

Conti-Brown: Chair Powell would say, “Absolutely not. We never let that kind of thing influence our thinking.” He’s both right and wrong about this. He’s definitely right in the sense that it is not in Jay Powell’s DNA to capitulate like this. I don’t think he’s scared of Donald Trump. I think he’s ready to fight this out. But the narratives and the headlines after a [rate] cut that Chair Powell and his colleagues will say is justified on the data will always include this fight in it. And that shapes the narrative about the Fed’s legitimacy. It gives people questions to explore and think about this question: Did the Fed cut in reaction to Donald Trump?

Now there’s a bigger problem, too, with this. Right now we’re seeing the Fed have to make some calls and decisions about some hard challenges. But what we’re also seeing is we have a dynamic economy. Some very strange things are happening in it. And the great glory of the Federal Reserve is it is a dynamic policymaking body. So, it can’t just do what has always been done in the face of changing circumstances. It’s going to need to do new things.

In order to do new things — like we saw in 2008 [after the Great Financial Crisis], after COVID-19, and in many other instances — the Fed requires political cover. You can’t have experimental central bankers who are simultaneously managing a battle with the sitting president. And so, when President Trump tries to demean the Federal Reserve in this way, he is limiting their power of maneuverability. And that’s extremely unfortunate.