WEBVTT - Why the Damage to Fed Independence May Have Already Been Done 0:00:02.480 --> 0:00:14.000 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.120 --> 0:00:21.080 Hello and welcome to another episode of the All Thoughts podcast. 0:00:21.200 --> 0:00:22.520 I'm Tracy Alloway. 0:00:22.200 --> 0:00:23.360 And I'm Joe wysn't Thal. 0:00:23.680 --> 0:00:25.760 Joe, you wrote a good newsletter this week. 0:00:25.840 --> 0:00:26.159 Thank you. 0:00:26.440 --> 0:00:29.720 Thank you for saying that just that one. I wrote 0:00:29.800 --> 0:00:34.120 a good newsletter this week. No but interesting week because 0:00:34.200 --> 0:00:38.440 obviously there's for months, you know, talk about FED independence, 0:00:38.479 --> 0:00:41.199 Would President Trump try to fire Jerome Powell? All of 0:00:41.240 --> 0:00:44.720 these different questions, It's heating up. This is a very 0:00:44.760 --> 0:00:48.000 difficult topic to talk about podcast wise, because there's always 0:00:48.000 --> 0:00:51.160 that chance that, you know, we record something on FED 0:00:51.200 --> 0:00:54.720 independence and by the time the episode is produced and edited, 0:00:54.960 --> 0:00:57.920 something new has happened. So very dicey, but you know, 0:00:57.960 --> 0:01:00.000 we're hoping that in the next short period of time 0:01:00.520 --> 0:01:03.400 this holds, because well, this is a really important story. 0:01:03.440 --> 0:01:06.480 We're recording this on July eighteenth, and I think the 0:01:06.520 --> 0:01:08.920 ambition is to get it out on July nineteenth, so 0:01:08.959 --> 0:01:12.679 hopefully nothing changes that quickly, but of course you never know. 0:01:12.840 --> 0:01:15.320 And just this week we have had these back and 0:01:15.360 --> 0:01:18.880 forth headlines. We had a report that Trump was considering 0:01:18.920 --> 0:01:22.120 firing Pal sort of imminently, and then he came out 0:01:22.160 --> 0:01:24.400 at a press conference and said no, he wasn't. 0:01:24.560 --> 0:01:26.320 Yeah, and he said there was a report that there 0:01:26.360 --> 0:01:29.800 was a literal letter that was saying other people affiliated 0:01:29.840 --> 0:01:34.080 Indian administration and hammering Powell. Some unrelated to monetary policies, 0:01:34.120 --> 0:01:36.520 some relating to the cost of renovations of the Federal 0:01:36.560 --> 0:01:40.680 Reserve offices. The criticism is of course getting intense. Anyway, 0:01:40.800 --> 0:01:43.280 I've been trying to learn more about this question of 0:01:43.280 --> 0:01:46.120 FED independence. I came across a lot of the research 0:01:46.240 --> 0:01:49.680 that was done by economist Carola Binder which had that 0:01:49.880 --> 0:01:52.800 was interesting, which talks about how FED independence is this 0:01:52.920 --> 0:01:56.360 cherished idea in economics. But it's not just about the 0:01:56.400 --> 0:02:00.640 idea of whether the FED is legally independent. Sure on 0:02:00.720 --> 0:02:03.640 the FED itself, even if the FED doesn't necessarily react, 0:02:03.680 --> 0:02:07.080 just the rhetoric against the FED and central banks around 0:02:07.120 --> 0:02:09.600 the world, not the FED specifically, but central banks around 0:02:09.639 --> 0:02:12.440 the world. Just the rhetoric and the pressure of the 0:02:12.480 --> 0:02:15.760 perception that the central bank is losing independence can have 0:02:15.840 --> 0:02:16.960 macroeconomic effects. 0:02:17.080 --> 0:02:21.000 Yeah, and despite some people cherishing that independence, we know 0:02:21.160 --> 0:02:24.440 from a lot of recent events, the rise of populism 0:02:24.480 --> 0:02:26.880 around the world, that it seems a lot of people 0:02:26.919 --> 0:02:28.520 don't like unelected bureaucrats. 0:02:28.560 --> 0:02:29.240 Yeah, let's just. 0:02:29.160 --> 0:02:29.760 Put it that way. 0:02:30.160 --> 0:02:33.360 Okay, So we actually have Kerala here. She is, of course, 0:02:33.400 --> 0:02:36.320 the Associate professor of economics in the School of Civil 0:02:36.480 --> 0:02:42.880 Leadership at UT Austin, Caroala, thank you so much for 0:02:42.919 --> 0:02:44.119 coming on odd lots. 0:02:44.600 --> 0:02:46.839 Yeah, thanks so much for having me fitty to be here. 0:02:47.639 --> 0:02:49.760 Do you just want to give us maybe a summary 0:02:49.880 --> 0:02:52.520 of your previous work and why you got interested in 0:02:52.560 --> 0:02:55.600 the subject of central bank independence in the first place. 0:02:56.480 --> 0:02:59.680 Sure, yeah, I mean the taper that was mentioned in 0:02:59.720 --> 0:03:03.000 the New Letters one called political pressure on central banks, 0:03:03.680 --> 0:03:06.480 and in that work, I really wanted to understand this 0:03:06.600 --> 0:03:11.120 distinction between legal central bank independence, which we know has 0:03:11.240 --> 0:03:14.639 been rising around the world for the past couple of decades, 0:03:15.200 --> 0:03:19.680 versus actual or de facto central bank independence, because it 0:03:19.720 --> 0:03:23.240 seems like even when the central bank does have legal 0:03:23.280 --> 0:03:27.200 protections that kind of insulate the bank from politics, there's 0:03:27.200 --> 0:03:31.800 still always going to be reason for politicians to try 0:03:31.800 --> 0:03:34.080 to convince the central bank to do what they want. 0:03:34.240 --> 0:03:37.040 I mean, that's the whole reason why we have legal 0:03:37.080 --> 0:03:40.760 protections on central bank independence. So it's kind of hard 0:03:40.840 --> 0:03:43.200 to measure that. What I ended up doing, with the 0:03:43.200 --> 0:03:46.920 help of a couple of research assistants, was reading through 0:03:47.200 --> 0:03:51.000 these reports by Economist Intelligence Unit that come out every 0:03:51.080 --> 0:03:54.640 quarter for basically every country and just seeing whenever there 0:03:54.680 --> 0:03:57.200 was a mention of some kind of political pressure on 0:03:57.240 --> 0:03:59.440 the central bank, and we tried to record whether it 0:03:59.480 --> 0:04:04.560 was pressure for easier or looser monetary policy, and also 0:04:04.680 --> 0:04:08.360 whether the central bank resisted the pressure or succumbed to it. 0:04:08.920 --> 0:04:11.080 And then once we had this new data set about 0:04:11.120 --> 0:04:14.000 all of these instances, at least all the known instances 0:04:14.040 --> 0:04:16.960 of pressure on central banks, then I was able to 0:04:17.040 --> 0:04:21.520 use that to say, well, what happens afterwards, especially to inflation. 0:04:22.200 --> 0:04:24.400 And as Joe said, if the central bank succumbs to 0:04:24.440 --> 0:04:28.520 the pressure, it's almost always pressure for looser monetary policy, 0:04:28.600 --> 0:04:32.520 So that's certainly followed by higher inflation. But even if 0:04:32.520 --> 0:04:36.960 they try to resist, inflation still rises, just not as much, 0:04:37.040 --> 0:04:41.880 but it still rises. So my interpretation there is that 0:04:42.279 --> 0:04:45.679 it probably has something to do with expectations. So people 0:04:45.720 --> 0:04:49.440 start at least worrying that there's a chance that the 0:04:49.480 --> 0:04:51.760 central bank is going to give in to those pressures. 0:04:52.360 --> 0:04:54.920 They know that if they do, that'll be inflationary, So 0:04:54.920 --> 0:04:59.120 inflation expectations rise right now, and that makes inflation itself 0:04:59.200 --> 0:04:59.800 start to rise. 0:04:59.800 --> 0:05:04.479 All to back up for a second, I described in 0:05:04.520 --> 0:05:07.040 the intro central bank independence one of these sort of 0:05:07.240 --> 0:05:11.720 very cherished ideas and perceived is extremely important. What are 0:05:11.760 --> 0:05:15.279 you describing? Why is this actually because as Tracy mentioned, 0:05:15.640 --> 0:05:18.359 there's a lot of people who find it distasteful that 0:05:18.400 --> 0:05:23.400 there are entities within any government that aren't directly democratically accountable. 0:05:24.000 --> 0:05:27.040 What is it about central bank independence that is perceived 0:05:27.080 --> 0:05:29.920 by economists to be such a goal, so to speak. 0:05:30.960 --> 0:05:32.880 So the way I see it as two main parts. 0:05:32.960 --> 0:05:36.560 One is that there is a natural inflationary bias in 0:05:36.640 --> 0:05:41.560 monetary policy, So meaning if you had monetary policy controlled 0:05:41.600 --> 0:05:46.560 by elected politicians, they would always have this concern about 0:05:46.680 --> 0:05:49.320 the next election. They always went to make the public 0:05:49.720 --> 0:05:52.799 happy in the short term, so they're going to tend 0:05:52.880 --> 0:05:56.279 towards re juicing the economy, even if in the longer 0:05:56.320 --> 0:05:59.600 run that's going to cause inflation. So in equilibrium, you're 0:05:59.600 --> 0:06:03.800 always running monetary policy to loose and getting too much inflation. 0:06:04.360 --> 0:06:07.279 That happens if you don't have an independent central bank. 0:06:07.360 --> 0:06:12.520 So if elected officials are controlling monetary policy. The other 0:06:12.600 --> 0:06:15.600 side of it is. Think about the distinction between fiscal 0:06:15.640 --> 0:06:19.600 policy and monetary policy. So having independent central banks is 0:06:19.800 --> 0:06:23.800 very common, having independent fiscal authorities is not. And the 0:06:23.880 --> 0:06:29.479 usual justification there is that fiscal policy has very obvious 0:06:29.760 --> 0:06:34.039 distributional consequences. I mean, that's basically the point of fiscal 0:06:34.080 --> 0:06:37.000 policy in some sense, like you want maybe you want 0:06:37.040 --> 0:06:40.280 progressive taxes, you want to spend on certain groups of people, 0:06:40.560 --> 0:06:43.640 you want to tax certain activities, and so that's inherently 0:06:43.720 --> 0:06:47.960 about distribution, which is something that you really want to 0:06:48.040 --> 0:06:51.120 be a political decision. You want, like the voters to 0:06:51.600 --> 0:06:56.760 decide about what kind of distribution they want. Monetary policy, 0:06:56.800 --> 0:06:59.400 on the other hand, is thought of as being a 0:06:59.400 --> 0:07:03.200 lot more even, right, it affects the macroeconomy more than 0:07:03.200 --> 0:07:07.600 it affects distribution. So in that way, it's like kind 0:07:07.640 --> 0:07:12.000 of more acceptable in a democracy to delegate it to 0:07:12.120 --> 0:07:17.120 some technocrats. That's kind of the traditional case, But of 0:07:17.160 --> 0:07:20.679 course that's been very much challenged, especially when the FED 0:07:20.880 --> 0:07:25.240 during the financial crisis started doing more unconventional monetary policies. 0:07:25.880 --> 0:07:30.320 Those did have distributional consequences. They're kind of hard to measure, 0:07:30.360 --> 0:07:33.960 but they're there, And even conventional monetary policy, like inflation 0:07:34.320 --> 0:07:37.320 is going to hurt some people more than others, having 0:07:37.720 --> 0:07:39.640 a weak labor market is going to hurt some people 0:07:39.680 --> 0:07:43.280 more than others. So I think people do partly get 0:07:43.320 --> 0:07:47.800 dissatisfied with central bank independence when they realize that whatever 0:07:47.840 --> 0:07:50.280 the FED is doing, I think maybe hurts them more 0:07:50.320 --> 0:07:52.800 than it hurts others, or that they didn't have any 0:07:52.880 --> 0:07:55.800 say and in that kind of decision, which it is 0:07:55.880 --> 0:07:59.840 political and inflation is political and monetary policy is too. 0:08:01.000 --> 0:08:03.880 You just reminded me on the topic of a natural 0:08:03.920 --> 0:08:07.920 bias towards loosening of monetary policy and therefore inflation. Do 0:08:07.960 --> 0:08:12.280 you ever get governments trying to pressure for higher interest rates? 0:08:12.320 --> 0:08:15.520 I feel like I can't come up with a single examples. 0:08:15.920 --> 0:08:19.440 Well, it might not be obviously for higher interest rates, 0:08:19.560 --> 0:08:22.240 but one of the few examples in that paper that 0:08:22.280 --> 0:08:26.160 I found of pressure for tighter monetary policy was in 0:08:26.240 --> 0:08:29.600 the US after the financial crisis, when the FED was 0:08:29.640 --> 0:08:32.600 doing so much QE and a lot of Republicans in 0:08:32.640 --> 0:08:35.240 Congress especially, we're worried that that was going to be 0:08:35.400 --> 0:08:39.000 very inflationary, so they were pressuring the FED to cut 0:08:39.040 --> 0:08:43.040 back on the QE or not do so much monetary easing. 0:08:43.280 --> 0:08:45.960 Those were wild times when we when a lot of people, 0:08:46.200 --> 0:08:49.840 myself included, probably thought q was going to be inflationary. 0:08:49.679 --> 0:08:51.760 Yeah, or people thought it was gonna be hyper inflationary. 0:08:51.920 --> 0:08:55.000 The more cynical interpretation, by the way, is not that 0:08:55.120 --> 0:08:58.239 Republicans thought that, And this is just the cynical interpretation. 0:08:58.360 --> 0:08:59.760 I'm not even saying, I'm going to say this, but 0:09:00.200 --> 0:09:02.200 not that they were worried about inflation, but that they 0:09:02.240 --> 0:09:06.400 didn't want the economy to recover particularly rapidly under a 0:09:06.440 --> 0:09:12.240 democratic president. Again, different perceptions of what their motivations are. 0:09:12.400 --> 0:09:12.720 Okay. 0:09:13.240 --> 0:09:15.440 One of the things people say, and you talk to 0:09:15.600 --> 0:09:18.360 like veteran people on Wall Street, and like they've always 0:09:18.440 --> 0:09:21.360 done this. This is nothing new in this country. Every 0:09:21.480 --> 0:09:25.640 president has in some way tried to pressure their central banker, 0:09:25.840 --> 0:09:28.240 typically for easing in some way. And I think there's 0:09:28.280 --> 0:09:31.640 all there's certainly examples of that, without question, how novel 0:09:31.720 --> 0:09:34.000 and different. When we talk about their attacking him over 0:09:34.040 --> 0:09:38.520 the cost of renovations, they're directly saying cut three hundred 0:09:38.559 --> 0:09:41.160 basis points in a tweet, et cetera. Does this feel 0:09:41.200 --> 0:09:45.440 like a meaningful step up in the level of pressure 0:09:45.480 --> 0:09:47.360 that we've historically seen in the US. 0:09:48.840 --> 0:09:51.400 Yeah, I think the meaningful difference is that it's so 0:09:51.559 --> 0:09:55.200 public now and so obvious, where it used to be 0:09:55.920 --> 0:10:00.240 like there was this protocol right that the president might 0:10:00.240 --> 0:10:03.559 want lower interest rates, they might want easier monetary policy, 0:10:03.600 --> 0:10:05.959 but they're not going to say so out loud. There 0:10:06.000 --> 0:10:09.040 was a lot of just careful procedure around it. So 0:10:09.120 --> 0:10:12.520 the fact that it's really really like a public spectacle 0:10:12.960 --> 0:10:17.839 now is a difference. It does, i think, further politicize 0:10:17.840 --> 0:10:21.000 the FED because now the general public sees the President 0:10:21.160 --> 0:10:24.199 tweeting about the FED, and depending on whether they support 0:10:24.200 --> 0:10:26.840 the President or not, they might be more angry at 0:10:26.840 --> 0:10:29.080 the FED or more defensive of the FED. So it 0:10:29.120 --> 0:10:32.760 really makes it public in a way that is pretty new. 0:10:33.320 --> 0:10:36.120 But I mean, I do get the point that there 0:10:36.240 --> 0:10:39.600 is always this pressure on the FED, always from within 0:10:40.000 --> 0:10:44.160 Congress too. You've had criticism of the FED, which coming 0:10:44.160 --> 0:10:46.280 from Congress. It's a bit more appropriate than from the 0:10:46.320 --> 0:10:50.760 President because the FED is accountable to Congress, So it 0:10:50.840 --> 0:10:53.520 kind of makes more sense that you would see a 0:10:53.520 --> 0:10:56.240 lot of criticism of the FED coming from Congress because 0:10:56.240 --> 0:11:00.560 that's more their role. They have the monetary that they've 0:11:00.600 --> 0:11:01.560 delegated to the fed. 0:11:02.600 --> 0:11:05.040 I know you're not in the sort of market coal 0:11:05.120 --> 0:11:08.240 mines on a daily basis, but I'm hoping, I'm hoping 0:11:08.280 --> 0:11:11.199 you may nevertheless have an opinion on this because one 0:11:11.200 --> 0:11:13.439 of the weird things that happened this week when all 0:11:13.440 --> 0:11:18.080 the headlines about Trump possibly firing Pal started to fly around, 0:11:18.360 --> 0:11:21.080 was the biggest reaction in the market seemed to be 0:11:21.280 --> 0:11:23.960 in the dollar, in the US currency, and we actually 0:11:23.960 --> 0:11:28.480 didn't see that much movement in yields, at least going up, 0:11:28.600 --> 0:11:31.600 like they didn't start surging. So I guess I'm curious. 0:11:31.679 --> 0:11:36.240 If your thesis holds that any type of pressure tends 0:11:36.280 --> 0:11:40.840 to be inflationary because it boosts perceptions of inflation, why 0:11:40.920 --> 0:11:45.120 wouldn't we have seen an upward rise in yields that 0:11:45.240 --> 0:11:46.199 reaction this week. 0:11:47.840 --> 0:11:51.440 Well, it's it's not that any type of pressure is inflationary. 0:11:51.440 --> 0:11:54.520 It is that, on average, across all of these hundreds 0:11:54.559 --> 0:11:57.160 of data points I was looking at, on average, pressure 0:11:57.200 --> 0:12:02.000 was inflationary. This particular could be very different, I think 0:12:02.040 --> 0:12:05.560 partly because there's so much, so much uncertainty about what 0:12:05.720 --> 0:12:08.560 is Trump actually going to do. It's hard to even 0:12:09.440 --> 0:12:12.000 follow the news here where he says he's going to 0:12:12.040 --> 0:12:15.079 fire Powell or no he didn't, you know, So any 0:12:15.200 --> 0:12:18.760 kind of announcement you get, I think the markets don't 0:12:18.800 --> 0:12:22.600 know exactly how to take it right away. And some 0:12:22.640 --> 0:12:25.600 of the news right like was already kind of baked in, 0:12:25.679 --> 0:12:29.240 Like we've known for a couple of months that President 0:12:29.280 --> 0:12:33.360 Trump was having this conflict with Chairman Powell. So maybe 0:12:33.400 --> 0:12:39.320 these most recent announcements are not really that much new news. 0:12:53.960 --> 0:12:56.040 Has the damage already been done? This is the sort 0:12:56.080 --> 0:12:59.800 of question that I'm wondering about, which is that, Okay, 0:13:00.040 --> 0:13:02.880 usure has existed to some extent forever, it's become much 0:13:02.920 --> 0:13:06.080 more of a public spectacle, it's become much more aggressive, 0:13:06.240 --> 0:13:10.439 et cetera. There is this, I would say safe assumption 0:13:11.040 --> 0:13:13.560 that Paula doesn't have that much longer in his term, 0:13:13.600 --> 0:13:16.640 but that the assumption is that the next FED chair 0:13:16.960 --> 0:13:21.280 will be some sort of capital l loyalist, too sure 0:13:21.800 --> 0:13:23.800 that there will be alignment. I forget who it was 0:13:23.840 --> 0:13:27.880 on TV talking about we need a new FED Treasury accord. 0:13:28.120 --> 0:13:30.720 So would you say, like to some extent, that the 0:13:30.760 --> 0:13:33.960 glass has been broken here or the glass has been cracked, 0:13:34.559 --> 0:13:37.280 and that the damage has been done, even if the 0:13:37.320 --> 0:13:41.880 FED legally retained its existing structure, that the FED going 0:13:41.920 --> 0:13:45.120 forward will not be the same independent FED. It will 0:13:45.120 --> 0:13:47.640 not be as independent as we've had for the last 0:13:47.679 --> 0:13:48.400 several decades. 0:13:49.600 --> 0:13:53.400 Yes, I think that the damage to the perception of 0:13:53.440 --> 0:13:58.040 the Fed's independence has already been done. There are really 0:13:58.040 --> 0:14:03.520 big political divides how people perceive the FED. The kind 0:14:03.559 --> 0:14:08.040 of tradition that one president would reappoint the previous president's 0:14:08.240 --> 0:14:11.000 FED share, even if they were from a different political party. 0:14:11.120 --> 0:14:14.880 I think that that tradition probably is over. 0:14:15.559 --> 0:14:18.280 Kind of like Supreme Court nominations which used to fly 0:14:18.400 --> 0:14:21.920 through now are entirely done on political like the votes 0:14:21.920 --> 0:14:24.600 on this confirmation votes are completely political now. 0:14:25.920 --> 0:14:28.760 Yeah, but I would say it's not just the fault 0:14:28.920 --> 0:14:32.840 of Trump since his election, since his most recent election. 0:14:32.960 --> 0:14:37.360 It's not just that. It's also what was happening during 0:14:37.640 --> 0:14:41.480 the pandemic and during the high inflation episode and twenty 0:14:41.520 --> 0:14:44.320 twenty one and twenty twenty two that did a lot 0:14:44.320 --> 0:14:47.840 of damage as well, because there was so much on 0:14:48.200 --> 0:14:51.320 both sides of trying to like place the blame and 0:14:51.440 --> 0:14:54.440 saying was everything, The Fed's fault was everything. The fault 0:14:54.440 --> 0:14:56.840 of the fiscal stimulus was it transitor, was inflation and 0:14:56.880 --> 0:15:02.320 transitory or permanent. That really got things more politicized then, 0:15:02.560 --> 0:15:06.440 and that's only been exacerbated by the past couple months. 0:15:06.680 --> 0:15:10.600 So one of the other narratives that I've seen this 0:15:10.680 --> 0:15:13.640 week is this idea that, Okay, even if Trump fired 0:15:13.760 --> 0:15:16.720 pal and put in place someone who would immediately push 0:15:16.920 --> 0:15:21.040 for lower interest rates, you wouldn't necessarily get them a 0:15:21.280 --> 0:15:25.160 because of the market expectations which you just describe, So 0:15:25.240 --> 0:15:28.440 people might start pricing in higher inflation expectations, which would 0:15:28.640 --> 0:15:31.800 move the curve up or steep in the curve. But 0:15:32.160 --> 0:15:36.320 also because it's not just the FED chair making decisions, 0:15:36.360 --> 0:15:39.720 it's a committee, and Trump might not be able to 0:15:39.760 --> 0:15:43.360 influence the entire committee. How do you take into account, 0:15:43.400 --> 0:15:46.560 I guess the rest of the FMC members. How do 0:15:46.640 --> 0:15:48.920 they play into this type of political pressure. 0:15:50.320 --> 0:15:54.560 Yeah, so it is monetary policy by committee and different 0:15:54.640 --> 0:15:58.280 under different FED chairs. The kind of committee decision making 0:15:58.400 --> 0:16:01.800 has differed a little, just the norms around it. So 0:16:02.200 --> 0:16:05.760 whether they like kind of how strong the FED chair 0:16:06.000 --> 0:16:08.760 was and making sure that everyone would come to a 0:16:08.760 --> 0:16:14.800 consensus versus allowing some more disagreement to be public. But yeah, 0:16:14.840 --> 0:16:17.000 I think the fact that I mean the fact that 0:16:17.680 --> 0:16:20.800 the members of the Committee have these overlapping terms and 0:16:20.840 --> 0:16:23.680 pretty long term lengths. Is part of what gives it 0:16:24.000 --> 0:16:26.800 independence because it means we don't have a complete turnover 0:16:26.880 --> 0:16:30.480 of the Committee at any given point in time, and 0:16:30.520 --> 0:16:33.680 there's going to be a lot of continuity there because 0:16:33.680 --> 0:16:37.680 of that institutional structure. Especially if you get a FED 0:16:37.760 --> 0:16:42.280 chair that's kind of external, that's viewed as a loyalist, 0:16:42.840 --> 0:16:45.280 the rest of the Committee may be quite reluctant to 0:16:45.360 --> 0:16:48.480 just go along with whatever the new FED chair says 0:16:48.560 --> 0:16:51.720 if they don't feel like it's the right decision. The 0:16:51.800 --> 0:16:55.520 FED to emphasize all the time that they're data dependent, 0:16:55.720 --> 0:16:57.440 and I think that's the line that a lot of 0:16:57.440 --> 0:17:01.520 Committee members would keep using. The unfortunate things we don't 0:17:01.520 --> 0:17:04.760 know exactly in what sense they are data dependent, Like 0:17:04.800 --> 0:17:08.360 they don't publish a monetary policy rule that they follow, 0:17:08.800 --> 0:17:12.280 but they say that they take into account not just 0:17:12.640 --> 0:17:15.320 the PCEE inflation rate and the unemployment rate, but all 0:17:15.359 --> 0:17:18.720 sorts of other indicators about where the economy is headed, 0:17:19.119 --> 0:17:23.160 and they react to all of those. So they would 0:17:23.280 --> 0:17:25.439 I'm pretty sure most of the Committee would try to 0:17:25.480 --> 0:17:27.840 just stick to the course that they're on, even if 0:17:27.880 --> 0:17:29.240 there were a new chair in place. 0:17:29.720 --> 0:17:34.560 It would be really interesting because dissents are very rare, 0:17:34.920 --> 0:17:37.280 and sometimes you get a lot of times you get 0:17:37.280 --> 0:17:39.880 no descent, sometimes you get one. Very rarely you get two. 0:17:39.920 --> 0:17:43.040 In the last in my career, I can't remember any 0:17:43.119 --> 0:17:45.480 decision in the US that I think ever got more 0:17:45.520 --> 0:17:48.040 than two descents. It would be interesting if that norm 0:17:48.240 --> 0:17:51.280 or broken, where the Fed really does not control or 0:17:51.320 --> 0:17:55.960 have basically get to guide the committee on their preferred path. 0:17:56.119 --> 0:17:59.080 I want to talk about in the broad research. Globally, 0:17:59.320 --> 0:18:03.080 establishing the independent central bank is politically difficult, and some 0:18:03.119 --> 0:18:06.880 countries attempt to do it by simply outsourcing their monetary 0:18:06.880 --> 0:18:10.159 policy to the Federal Reserve itself, by setting up a 0:18:10.200 --> 0:18:13.000 dollar peg or currency board or something like that, because 0:18:13.000 --> 0:18:15.879 they don't even have the sort of political capacity to 0:18:16.119 --> 0:18:20.119 establish a truly independent central bank. What are the patterns 0:18:20.200 --> 0:18:23.320 you see around the world. I'm curious in your research 0:18:23.760 --> 0:18:28.040 when pressure builds on a central bank, is it usually 0:18:28.080 --> 0:18:31.879 sort of a symptom of a broader domestic political disintegration 0:18:32.040 --> 0:18:35.879 that's happening where just all kinds of norms are being violated, 0:18:36.000 --> 0:18:39.000 or all kinds of structures are sort of collapsing or 0:18:39.040 --> 0:18:40.160 deteriorating in some way. 0:18:40.920 --> 0:18:43.360 Yeah, Well, to the part about how the central bank 0:18:43.400 --> 0:18:47.359 independence is set up, Sometimes it's because there's already a 0:18:47.480 --> 0:18:51.280 very strong preference in that country for lower inflation, So 0:18:51.960 --> 0:18:53.840 then it's kind of easier to set up an independent 0:18:53.880 --> 0:18:56.920 central bank because they really want low inflation and they're 0:18:57.000 --> 0:18:59.240 committed to it, which is why it's so hard and 0:18:59.280 --> 0:19:03.359 the research to say the central bank independence actually lower 0:19:03.359 --> 0:19:08.000 inflation because you have like a reverse causality. So sometimes 0:19:08.040 --> 0:19:11.120 that's how it gets set up. Sometimes it's imposed by 0:19:11.440 --> 0:19:13.959 like the IMF saying, you know, if you want to 0:19:14.080 --> 0:19:16.199 keep having our support, there's some things you need to do, 0:19:16.280 --> 0:19:19.240 and one of them is set up as independent central bank. 0:19:20.200 --> 0:19:23.520 But then the part about like when do politicians start 0:19:24.200 --> 0:19:27.320 pressuring the central bank? When does that really build up? Yeah, 0:19:27.359 --> 0:19:29.520 I mean there was a lot more of the pressure 0:19:29.600 --> 0:19:33.959 on the central banks around around crisis times. So I 0:19:34.000 --> 0:19:38.560 think the financial crisis did erode a lot of trust 0:19:38.600 --> 0:19:43.879 and institutions and made it more acceptable to pressure central banks. Also, 0:19:44.480 --> 0:19:49.800 during the twenty tens, when inflation was really low, that 0:19:50.000 --> 0:19:54.560 made it seem more like, Okay, having higher inflation doesn't 0:19:54.640 --> 0:19:57.600 necessarily seem like so much of a threat. What we 0:19:57.720 --> 0:20:00.360 really want is to boost the labor markets, at least 0:20:00.600 --> 0:20:03.560 in certain countries, so then there was more pressure on 0:20:03.600 --> 0:20:06.560 the central banks that way. The other thing is also 0:20:06.720 --> 0:20:09.920 like the fiscal situation. So if there's big, big debts 0:20:09.920 --> 0:20:12.760 to finance, right, and then there's going to be often 0:20:12.800 --> 0:20:15.159 pressure for the lower interest rates or to monetize the 0:20:15.200 --> 0:20:16.680 debt tracy. 0:20:16.720 --> 0:20:19.760 By the way, just as we're recording this headline from 0:20:19.840 --> 0:20:22.879 the AP, all this stuff about criticism of the FED, 0:20:22.960 --> 0:20:25.560 it turns out Chris Rugerberg Josh Bolke of the AP 0:20:25.840 --> 0:20:29.800 reporting much of these costs were associated in twenty twenty 0:20:29.800 --> 0:20:33.720 with Trump officials demanding that there'll be more marble at 0:20:33.720 --> 0:20:36.760 the FED instead of glass. So a new wrinkle to 0:20:36.800 --> 0:20:38.880 the cost of these office constructions. 0:20:38.880 --> 0:20:42.640 Anyway, you gotta have that marble. Trump loves marble, marble 0:20:42.680 --> 0:20:46.320 and gold. He does have a very Louis the fifteenth style, 0:20:46.520 --> 0:20:51.240 I guess tastes in interior design. Anyway, maybe we should 0:20:51.280 --> 0:20:53.520 do an interior design. Yeah, yeah, I don't like that. 0:20:54.000 --> 0:20:54.359 Okay. 0:20:54.400 --> 0:20:59.159 Anyway, On a serious note, given those concerns around trusting 0:20:59.400 --> 0:21:03.399 unelected bureaucrats and the idea that maybe you know, central 0:21:03.440 --> 0:21:07.480 banks started to overstep their traditional roles post two thousand 0:21:07.520 --> 0:21:11.399 and eight or something like that. What's the best way of, 0:21:11.600 --> 0:21:16.399 I guess, ensuring that central banks are in some way 0:21:16.680 --> 0:21:20.439 answerable to the electorate or in some way you know, 0:21:20.840 --> 0:21:24.880 there's accountability there without sacrificing that independence. 0:21:26.119 --> 0:21:28.879 Yeah. I mean, this is a really important topic to 0:21:28.960 --> 0:21:30.960 me and something I focus a lot on in my 0:21:31.080 --> 0:21:33.720 book and in some of my other research. But I 0:21:33.800 --> 0:21:37.120 think that making sure that the role of the FED 0:21:37.240 --> 0:21:40.400 or the Central Bank is limited to something like price 0:21:40.400 --> 0:21:44.600 stability and having a lot of transparency about how they're 0:21:44.640 --> 0:21:48.520 achieving that is really important. So the FED has a 0:21:48.960 --> 0:21:52.480 dual mandate. Having the price stability and the employment side 0:21:52.480 --> 0:21:55.760 of the mandate gives them a lot of discretion because 0:21:55.800 --> 0:21:58.239 sometimes those two goals can come into conflict and then 0:21:58.280 --> 0:21:59.879 they need to just decide, well, what are we going 0:21:59.920 --> 0:22:05.760 to prioritize right now. The more discretion that unelected technocrats have, 0:22:06.359 --> 0:22:08.879 the more room there is for people to try to 0:22:08.920 --> 0:22:11.440 pressure them one way or the other. In my book, 0:22:11.440 --> 0:22:15.199 I advocate for a nominal GDP or a nominal income target, 0:22:15.240 --> 0:22:18.199 which I think would help them achieve both parts of 0:22:18.240 --> 0:22:21.760 that dual mandate, but with a single target that they're 0:22:21.960 --> 0:22:24.840 going after, and then it makes it really clear at 0:22:24.880 --> 0:22:27.960 any given point of time do they need tighter or 0:22:28.000 --> 0:22:31.640 looser monetary policy, and there's not as much like wiggle room. 0:22:32.000 --> 0:22:34.480 It makes it easier for them to justify their actions 0:22:34.520 --> 0:22:36.760 and for the public to say, well, are they doing 0:22:36.800 --> 0:22:40.040 what they say they're going to do or not? Versus 0:22:40.160 --> 0:22:44.240 if you have an inflation target and kind of full 0:22:44.240 --> 0:22:48.919 employment target, then you can always argue kind of for 0:22:49.000 --> 0:22:52.600 either way. And yeah, so just keeping the role more limited. 0:22:52.960 --> 0:22:56.280 Not lately, but before COVID, there was a lot more 0:22:56.560 --> 0:22:59.600 pressure around central banks to do even more beyond those 0:22:59.680 --> 0:23:02.040 kind of two parts of the dual mandate, to take 0:23:02.040 --> 0:23:06.679 on climate change and inequality and issues like that. And 0:23:06.720 --> 0:23:10.920 I think that those are important things that somebody needs 0:23:10.960 --> 0:23:12.840 to do, but it's not really the job of the 0:23:12.880 --> 0:23:15.280 FED because they're not elected to do that, and those 0:23:15.359 --> 0:23:20.320 kinds of political topics need to be addressed by elected officials. 0:23:20.760 --> 0:23:23.200 One of the funny things I used to think of 0:23:23.240 --> 0:23:26.600