Fed independence is the real story in Wednesday’s interest rate decision: CEI analysis

Today, the Federal Reserve announced it is cutting interest rates by 25 basis points, the first cut in nine months. CEI senior economist Ryan Young says the Fed’s decision indicates that it still controls its own monetary policy, but concerns over the central bank’s independence are continuing to brew.

“The big story from this week’s Fed meeting isn’t the quarter-point interest rate cut. It’s who made that decision. Is the Fed making its own policy, or is it following orders from the president? It’s a separation of powers issue. Reading between the lines, the Fed still seems in charge of its own policy.

“A rate cut was likely to happen anyway. Tariffs have already started to raise unemployment and slow growth, and projections are for slower growth ahead.

“Those same tariffs are also raising inflation indicators, which is why the Fed was reluctant to cut rates until now. Economic slowdowns are often more important in the Fed’s decisions than inflation control, hence the rate cut.

“The vote was also 11-1. The only dissenter was President Trump’s newest appointee, Stephen Miran, who voiced the administration’s desire for a steeper half- point cut. Miran did not resign from his White House position upon joining the Fed, exposing a potential conflict of interest.

“Lisa Cook, who Trump is trying to fire from the Fed’s Board of Governors, voted with the majority for a quarter-point cut. If she leaves, Trump appointees will make a majority of the seven-member Board of Governors, potentially giving the president more say over Fed decisions.

“The reason the Fed’s independence is so important is the risk of runaway inflation. When politicians control central banks, as President Trump is trying to do, the result is nearly always high inflation. Peron-era Argentina and Turkey today under Erdogan are just two examples.

“Finally, it is concerning that Miran’s monetary views do not line up with the Fed’s mission. The Fed has a dual mandate of balancing low inflation and low unemployment. Instead of pursuing either of those, Miran reportedly wants to devalue the dollar in order to manipulate the balance of trade. Achieving Miran’s goal would require high inflation. The ensuing price instability would likely also disrupt the labor market, violating both planks of the Fed’s dual mandate.”