(Yahoo! Finance) - Is it too late to save Fed independence?
Last month, I surprised many by suggesting that Jerome Powell should resign as Chairman of the Federal Reserve to protect the policy independence of the world’s most influential central bank. He did not do so.
The attacks on the institution have since broadened and deepened, and now, worrisome cracks are beginning to appear in a long-standing principle that is crucial to the well-being of both the American and global economies.
In an alternative world, Chair Powell would serve out his term, which runs through May, while the independence of the Fed would remain unquestioned, and monetary policy would be appropriately set. But such a world is not possible, given the profound animosity between President Trump and Powell.
This animosity, born of years of disagreements since Powell’s appointment in Trump’s first term — and, some may even say, broken promises — has now metastasized. It has been spreading to many aspects of the Federal Reserve, drawing in more political actors and undermining the public’s already declining trust in the central bank and its chair, whose confidence rating has fallen to below 40% according to a Gallup poll released in April.
In recent months, the Trump administration appears to have sought "cause" to dismiss Powell. This campaign has included a made-for-TV exposition of the Fed’s building renovation project, which was over budget. It has been combined with constant attacks on Powell’s competency and politics, not just from the president but also from an expanding cast of characters that includes the Treasury Secretary, other senior administration officials, and the speaker of the House of Representatives.
Most recently, the administration has set its sights on one of Powell’s colleagues on the Board, Governor Lisa Cook, citing unproven allegations of mortgage fraud. The initial calls for Cook to resign and for Powell to dismiss her took a dramatic turn this week when President Trump "fired" her. Cook responded by stating that the president had no legal authority to do so, that she would sue, and that she would continue to serve in her role at the Fed. The legal battles have started.
This is not merely an administration-Cook issue. It is difficult to see how Powell can resist launching an internal Fed investigation. He may even have to decide whether to allow Cook back in the building during this period of legal battles and uncertainties.
Meanwhile, it is becoming increasingly evident to many that what is at stake now for the Fed goes well beyond the Board of Governors. If Governor Cook is eventually replaced with a close Trump loyalist, the board could secure enough votes to complicate the reappointment in February of every president of the 12 regional Federal Reserve banks, threatening to politicize the entire system in an unprecedented and unpredictable fashion.
For someone like me, who believes in the critical importance of Fed independence, this is deeply unsettling. It is even more disturbing because I feel that this situation may have been avoided if Powell had resigned earlier, granting the president a visible political win that might have prompted him to move on.
Needless to say, some of my friends and colleagues have pushed back, arguing that a Powell resignation would, in itself, weaken Fed independence and open the door to a political appointee at the very highest level of this crucial economic institution. If warranted, this concern would likely play out in any case, given the proximity of Powell’s end of term in May, with a "lame duck" status before that date. On a more encouraging note, the administration’s reported list of 11 potential successors is anchored by respected and well-qualified individuals. Moreover, while the Fed tends to be "chair-centric," the chair requires the support of others on key decisions.
An early Powell resignation would have also allowed a new chair to initiate reforms that even the Fed’s strongest supporters, including myself, feel are long overdue. From stronger accountability and oversight to combating groupthink and reforming key elements of the overarching monetary framework, there is much to be done to preserve not only the central bank's credibility and effectiveness but also to improve the prospects for good economic outcomes.
The question of whether the ship has now sailed — whether a Powell resignation today would have the same prospects for protecting the central bank’s independence as one earlier — is a difficult one to answer.
Much has happened in recent weeks, and some of it cannot now be undone. What I do know is that this will remain an issue for discussion with friends and colleagues, with neither side likely to ever establish an agreed-upon counterfactual.
Dr. Mohamed A. El-Erian is the chief economic adviser of Allianz and president-elect of Queens’ College, Cambridge. The author of two New York Times bestsellers, he is a senior adviser to Gramercy, professor of practice at the Wharton School (University of Pennsylvania), and senior global fellow of the Lauder Institute.
