Is Fed independence at risk?

President Trump's public criticism of the Fed isn't new. But in its second term, the Trump administration is preparing to turn words into action. It's setting in motion a challenge to the precedent that has long prevented presidents from firing officials of independent agencies without cause. So is the Fed's independence in jeopardy? And how much independence should the Fed have anyway? I'm Alison Nathan, and this is Goldman Sachs Exchanges. Each month, I speak with investors, policymakers, and academics about the most pressing market moving issues for our top of mind report from Goldman Sachs

created the Fed as what we call an independent agency in 1913 and intended it for it to have a degree of independence. How so? First, Federal Reserve governors have fourteen year terms and they are appointed on a staggered basis so that governor terms come up only once every two years. The idea being originally that it would be difficult for any one president to appoint an entire board. Secondly, Federal Reserve governors can only be removed for cause, and for cause has been interpreted by the Supreme Court as malfeasance, neglect, or dereliction of duty. So, essentially, the congress intended

So in some sense, it is a political organization.

It is a creation of Congress, but the Fed has instrument independence, which is a fancy way of saying the Fed can raise or lower interest rates or buy and sell treasuries without political interference. The Fed does not have goal independence, and so the goals of monetary policy are set by legislation. And the goals of the Fed have changed over time by Congress. And so in 1913, when the Fed was set up, the goal was to provide, quote, an elastic currency to facilitate bank intermediation. And then over time, it was recognized, in particular, after World War two that the Fed had an important rol

Cochrane also explained that the Fed's independence is not absolute. Fed

independence is not written in the bible as the eleventh commandment. The Fed shall be independent. It is something invented by our policy system or by congress for congress's purposes. The fed is independent, but what are the rules of the game? The fed has a limited mandate. So the fed's job is inflation and employment. And then when you say inflation and employment, you mean and nothing else. And a little bit of financial stability too. But your mandate does not include. Even if you think climate's the catastrophe coming, it's not your job. That's the price of independence. You can be allowe

Clarida says that this independence is important to produce better economic outcomes, especially lower inflation. And he's more concerned about threats to independence today than he was during his time at the Fed.

Well, Fed independence is very important in the very specific sense that history and academic research has shown consistently that an independent central bank produces lower inflation, less volatile inflation, but without any other trade off in terms of excessive financial or real volatility. So in the data, it's the closest thing to a free lunch that you get in terms of economic policy. Interesting.

Do you perceive any difference between Trump's attitude toward the Fed today versus during his first term?