Powell-Trump clash: Central bank independence matters for economic growth and financial stability

Subscribe to enjoy similar stories. The latest spat between US Federal Reserve chair Jerome Powell and US President Donald Trump strikes at the very heart of what central banks hold dear as the key to not just long-term financial stability, but also economic growth: central bank independence. Calling the Department of Justice probe into the testimony he gave last year to a Senate panel on renovations of Fed buildings “unprecedented," Powell said he believed the action was a direct consequence of the president’s anger over the Fed’s refusal to reduce interest rates despite White House pressure.

There seems little scope for scandal in a prima facie case of cost-overruns and a lavish budget for a premises upgrade. But history has shown that central banks that are shielded from political influence deliver better economic outcomes—especially price stability—than those ready to buckle under it. This stands to reason.

Elected governments typically take a short-term view shaped by an electoral cycle. Central banks, in contrast, can afford a longer view even if it means near-term pain. Plus, as guardians of fiat money, they must not let it get debased needlessly.

In general, the need to meet publicly set goals like inflation control explains why the autonomy of a monetary authority is seen to help keep an economy stable. Granted, absolute freedom is a myth. After all, the central bank is an arm of policy, if not directly of government policy.

Both the US Fed and Reserve Bank of India (RBI) are governed by statutes: the Federal Reserve Act of 1913 and RBI Act of 1934, respectively. Although these laws do not explicitly talk of ‘independence,’ both have significant leeway on operations. To a purist, this might not fully tick the