Why the Damage to Fed Independence May Have Already Been Done

Summary

Episode Summary: "Why the Damage to Fed Independence May Have Already Been Done"

Podcast: Odd Lots
Host/Author: Bloomberg
Episode: Why the Damage to Fed Independence May Have Already Been Done
Release Date: July 19, 2025
Guests: Carola Binder, Associate Professor of Economics, UT Austin

Introduction to Fed Independence

In this episode of Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve into the contentious issue of Federal Reserve (Fed) independence, particularly in the context of recent political pressures. The discussion is sparked by ongoing debates over whether former President Donald Trump attempted to fire Fed Chair Jerome Powell, highlighting the fragile nature of the Fed's autonomy.

Recent Political Pressures on the Fed

Tracy Alloway opens the conversation by referencing a tumultuous week where reports emerged suggesting that President Trump was considering removing Jerome Powell from his position:

"We had a report that Trump was considering firing Powell imminently. And then he came out at a press conference and said, no, he wasn't."
(03:34)

Joe Weisenthal adds context by explaining the mixed signals from the administration, including pressure related to non-monetary issues like the cost of Fed office renovations:

"Other people affiliated in the administration have been hammering Powell, some unrelated to monetary policy, some relating to the cost of renovations of the Federal Reserve offices."
(03:40)

The Importance of Central Bank Independence

The conversation shifts to the fundamental reasons why central bank independence is a cornerstone in economics. Carola Binder, an expert in the field, explains the dual benefits of an independent central bank:

"There is a natural inflationary bias in monetary policy. If elected officials control monetary policy, they tend to juice the economy for short-term gains, leading to higher long-term inflation."
(07:09)

She further distinguishes between fiscal and monetary policy, emphasizing that while fiscal decisions inherently involve distributional impacts and should remain under democratic control, monetary policy is more evenly spread across the economy and thus suitable for technocratic management.

Research Insights: Political Pressure and Inflation

Carola Binder presents her research on how political pressure affects central banks worldwide. Drawing from extensive data analysis, she reveals that political pressures—whether they result in policy changes or not—tend to elevate inflation expectations, subsequently leading to actual inflation rises.

"Pressure on the Fed leads to higher inflation expectations, which in turn makes inflation itself start to rise."
(07:09)

Tracy Alloway and Joe Weisenthel discuss historical examples, such as the post-2008 financial crisis period when the Fed engaged in quantitative easing (QE). Binder notes that political actors, particularly Republicans in Congress, pressured the Fed to limit QE, fearing its inflationary consequences:

"Pressure was inflationary, but in this particular case, the markets didn't respond as expected because there was already uncertainty about Trump's intentions."
(13:57)

The Shift to Public Pressure

A significant shift noted by Binder is the transparency and public nature of current political pressures compared to historical, more subdued interactions:

"The meaningful difference now is that it's so public. It further politicizes the Fed because the general public sees the President directly criticizing the Fed."
(11:58)

This public nature undermines the Fed's perceived independence and increases public scrutiny and politicization of its decisions.

Committee Dynamics and Future Implications

Binder elaborates on the Federal Open Market Committee (FOMC) structure, highlighting that even with a new Fed Chair perceived as politically aligned, the committee's diverse and staggered terms provide a buffer against unilateral shifts in policy:

"The overlapping terms and long-term memberships of the committee ensure continuity and prevent complete turnover, maintaining a degree of independence."
(19:56)

However, Weisenthel posits that the erosion of independence might already have long-lasting effects, drawing parallels to the politicization of Supreme Court nominations:

"The tradition of one president reappointing the previous president's Fed chair is probably over, much like how Supreme Court confirmations have become highly politicized."
(18:21)

Global Perspectives and Institutional Trust

When expanding the lens globally, Binder notes that countries experiencing broader political instability or erosion of democratic norms often see increased pressures on their central banks. She cites Turkey as an example where democratic backsliding has coincided with mounting pressures on the central bank.

"Central bank independence often aligns with a country's commitment to low inflation, and political crises can undermine this independence, leading to higher inflation."
(22:47)

Balancing Accountability and Independence

Addressing concerns about accountability without sacrificing independence, Binder advocates for clearer, more focused mandates for central banks. She suggests replacing the dual mandate with a single target, such as nominal GDP, to reduce discretion and limit areas for political pressure.

"A nominal GDP target would make it clear what the central bank is aiming for, reducing wiggle room and making their actions more transparent and accountable."
(25:32)

Conclusion: The Glass is Cracked

In wrapping up, Binder asserts that the perception of the Fed's independence has been irreparably damaged by recent public and aggressive political pressures. This erosion of trust could have enduring macroeconomic implications, as higher inflation expectations become entrenched.

"The damage to the perception of the Fed's independence has already been done. The tradition of bipartisan appointments is likely over."
(17:55)

Tracy Alloway and Joe Weisenthel conclude by acknowledging that while the Fed's institutional structure offers some resilience, the shifting political landscape poses significant challenges to maintaining its traditionally independent stance.

Key Takeaways

• Central Bank Independence: Crucial for preventing politically motivated monetary policies that could lead to long-term inflation.

• Political Pressure: Public and aggressive pressures on the Fed can raise inflation expectations, even if policies remain unchanged.

• Committee Structure: The FOMC's design offers some protection against unilateral political influences, but sustained public pressure may still erode independence.

• Global Trends: Political instability and erosion of democratic norms globally correlate with increased pressures on central banks.

• Future Implications: The lasting damage to Fed independence may lead to higher inflation expectations and reduced efficacy in controlling inflation.

Notable Quotes

• Carola Binder:

  "Pressure on the Fed leads to higher inflation expectations, which in turn makes inflation itself start to rise."
  (07:09)

• Carola Binder:

  "The meaningful difference now is that it's so public. It further politicizes the Fed because the general public sees the President directly criticizing the Fed."
  (11:58)

• Joe Weisenthel:

  "The damage to the perception of the Fed's independence has already been done."
  (17:55)

Further Information

For more insights and in-depth discussions on finance, markets, and economics, visit bloomberg.com/oddlots. You can also join the conversation on their Discord channel to engage with other listeners.

Transcript

[PGIM Representative]

At pjum. Our global perspective today unlocks investment opportunities tomorrow. Our 1400 investment professionals provide global expertise and local insights to help you navigate the complexities of a changing world. We offer a diverse range of active strategies across public and private markets to help you identify opportunities and achieve your long term goals. PGM Our investments Shape Tomorrow Today.

[Oracle Representative]

In business they say you can have better, cheaper or faster. But you only get to pick two. What if you could have all three at the same time? That's exactly what Cohere, Thomson Reuters and Specialized Bikes have since they upgraded to the next generation of the cloud. Oracle Cloud Infrastructure OCI is the blazing fast platform for your infrastructure, database, application development and AI needs where you can run any workload in a high availability, consistently high performance environment and spend less than you would with other clouds. How is it faster? OCI's block storage gives you more operations per second cheaper. OCI costs up to 50% less for computing, 70% less for storage and 80% less for networking better. In test after test, OCI customers report lower latency and and higher bandwidth versus other clouds. This is the cloud built for AI and all your biggest workloads right now with zero commitment. Try OCI for free. Head to oracle.com strategic that's oracle.com strategic.

[PGIM Representative]

Want to feel more creative but don't have the right laptop? Lenovo.com can help. Look through our legendary lineup of AI powered PCs and devices and find the one that fits your passion. Our PCs, powered by Intel Core Ultra processors as well as cutting edge AI tools. Tools allow students to focus, learn and create with ease. That's the power of Lenovo with Intel Inside. Plus, college students and teachers can get 5% off their order. Shop now on Lenovo.com the future's waiting and it needs you.

[Bloomberg Representative]

Bloomberg Audio Studios Podcasts, Radio News.

[Joe Weisenthal]

Hello.

[Tracy Alloway]

And welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal.

[Tracy Alloway]

Joe, you wrote a good newsletter this week.

[Joe Weisenthal]

Thank you. Thank you for saying that.

[Tracy Alloway]

Just, just that one.

[Joe Weisenthal]

I wrote a good newsletter this week. No, but interesting week because obviously there's for months, you know, talk about Fed Independence. Would President Trump try to fire Jerome Powell? All of these different questions. It's heating up. This is a very difficult topic to talk about podcast wise because there's always that chance that, you know, we record something on Fed Independence and by the time the episode is produced and edited, something new has happened. So very dicey. But you know, we're hoping that in the next short period of Time this holds. But, yes, this is a really important story.

[Tracy Alloway]

We're recording this on July 18, and I think the ambition is to get it out on July 19th. So hopefully nothing changes that quickly. But of course, you never know. And just this week, we have had these back and forth headlines. We had a report that Trump was considering firing Powell sort of imminently. And then he came out at a press conference and said, no, he wasn't.

[Joe Weisenthal]

Yeah. And he said there was a report, that there was a literal letter that was signed. Other people affiliated in the administration have been hammering Powell, some unrelated to monetary policy, some relating to the cost of renovations of the Federal Reserve offices. The criticism is, of course, getting intense. Anyway, I've been trying to learn more about this question of Fed independence. I came across a lot of the research that was done by economist Carola Binder, which I thought was interesting, which talks about how Fed independence is this cherished idea in economics, but it's not just about the idea of whether the Fed is legally independent. Pressure on the Fed itself, even if the Fed doesn't necessarily react. Just the rhetoric against the Fed in central banks around the world. Not the Fed specifically, but central banks around the world. Just the rhetoric and the pressure. The perception that the central bank is losing independence can have macroeconomic effects.

[Tracy Alloway]

Yeah. And despite some people cherishing that independence, we know from a lot of recent events, the rise of populism around the world, that it seems a lot of people don't like unelected bureaucrats.

[Joe Weisenthal]

Yeah, that's right.

[Tracy Alloway]

Just put it that way. Okay, so we actually have Carola here. She is, of course, the associate professor of economics in the School of Civil Leadership at UT Austin.

[Joe Weisenthal]

Hook Em.

[Tracy Alloway]

Carilla, thank you so much for coming on odd lots.

[Carola Binder]

Yeah, thanks so much for having me. Excited to be here.

[Tracy Alloway]

Do you just want to give us maybe a summary of your previous work and why you got interested in the subject of central bank independence in the first place?

[Carola Binder]

Sure, yeah. I mean, the paper that was mentioned in the newsletter is one called Political Pressure on Central Banks. And in that work, I really wanted to understand this distinction between legal central independence, which we know has been rising around the world for the past couple of decades, versus actual or de facto central bank Independence. Because it seems like even when the central bank does have legal protections that kind of insulate the bank from politics, there's still always going to be reason for politicians to try to convince the central bank to do what they want. I mean, that's the whole reason why we have legal protections on central bank Independence. So it's kind of hard to measure that. What I ended up doing with the help of a couple of research assistants was reading through these reports by Economist Intelligence Unit that come out every quarter for basically every country and just seeing whenever there was a mention of some kind of political pressure on the central bank. And we tried to record whether it was pressure for easier or looser monetary policy, and also whether the central bank resisted the pressure or succumbed to it. And then once we had this new data set about all of these instances, at least all the known instances of pressure on central banks, then I was able to use that to say, well, what happens afterwards, especially to inflation. And as Joe said, if the central bank succumbs to the pressure, it's almost always pressure for looser monetary policy. So that's certainly followed by higher inflation. But even if they try to resist, inflation still rises. Just not as much, but it still rises. So my interpretation there is that it probably has something to do with expectations. So people start at least worrying that there's a chance that the central bank is going to give in to those pressures. They know that if they do, that'll be inflationary. So inflation expectations rise right now, and that makes inflation itself start to rise.

[Joe Weisenthal]

Also, to back up for a second, I described in the intro central bank independence one of these sort of very cherished ideas and perceived as extremely important. Why don't you describe, like, why is this actually? Because as Tracy mentioned, there's a lot of people who find it distasteful that there are entities within any government that aren't directly democratically accountable. What is it about central bank independence that is perceived by economists to be such a. Such a goal, so to speak.

[Carola Binder]

So the way I see it is two main parts. One is that there is a natural inflationary bias in monetary policy. So, meaning if you had monetary policy controlled by elected politicians, they would always have this concern about the next election. They always want to make the public happy in the short term. So they're going to tend towards juicing the economy, even if in the longer run that's going to cause inflation. So in equilibrium, you're always running monetary policy too loose and getting too much inflation. That happens if you don't have an independent central bank. So if elected officials are controlling monetary policy, the other side of it is think about the distinction between fiscal policy and monetary policy. So having independent central banks is very common. Having independent fiscal authorities is not. And the usual justification there is that fiscal policy has very obvious distributional consequences. I mean, that's basically the point of fiscal policy in some sense. Maybe you want progressive taxes, you want to spend on certain groups of people, you want to tax certain activities. And so that's inherently about distribution, which is something that you really want to be a political decision. You want the voters to decide about what kind of distribution they want. Monetary policy, on the other hand, is thought of as being a lot more even. Right. It affects the macro economy more than it affects distribution. So in that way it's like kind of more acceptable in a democracy to delegate it to some technocrats. That's kind of the, like, traditional case. But of course, that's been very much challenged, especially when the Fed during the financial crisis started doing more unconventional monetary policies did have distributional consequences. They're kind of hard to measure, but they're there. And even conventional monetary policy like inflation is going to hurt some people more than others. Having a weak labor market is going to hurt some people more than others. So I think people do partly get dissatisfied with central bank independence when they realize that whatever the Fed is doing, I think maybe hurts them more than it hurts others or that they didn't have any say in that kind of decision, which it is political. Inflation is political and monetary policy is too.

[Tracy Alloway]

You just reminded me on the topic of a natural bias towards loosening of monetary policy and therefore inflation. Do you ever get governments trying to pressure for higher interest rates? I feel like I can't come up with a single example.

[Carola Binder]

Well, it might not be obviously for higher interest rates, but one of the few examples in that paper that I found of pressure for tighter monetary policy was in the US after the financial crisis when the Fed was doing so much qe. A lot of Republicans in Congress especially were worried that that was going to be very inflationary. So they were pressuring the Fed to cut back on the QE or not do so much monetary easing.

[Tracy Alloway]

Those were wild times when we. When a lot of people, myself included, probably thought QE was going to be inflationary.

[Joe Weisenthal]

Yeah, people thought it would be hyperinflationary. The more cynical interpretation, by the way, is not that Republicans thought that. And this is just the cynical interpretation. I'm not even saying I'm going to say this, but not that they were worried about inflation, but that they didn't want the economy to recover particularly rapidly under a Democratic president. Again, different perceptions of what their motivations are. Okay. One of the things people say, and you talk to like veteran people on Wall street and like, they've always done this, this is nothing new in this country. Every President has in some way tried to pressure their central banker, typically for easing in some way. And I think there's, there are certainly examples of that, without question. How novel and different when we talk about, they're attacking over the cost of renovations, they're directly saying cut 300 basis points in a tweet, etc. Does this feel like a meaningful step up in the level of pressure that we've historically seen in the U.S. yeah.

[Carola Binder]

I think the meaningful difference is that it's so public now and so obvious where it used to be, like there was this protocol, right, that the President might want lower interest rates, they might want easier monetary policy, but they're not going to say so out loud. There was a lot of just careful procedure around it. So the fact that it's really, really like a public spectacle now is a difference. It does, I think, further politicize the Fed because now the general public sees the President tweeting about the Fed and depending on whether they support the President or not, they might be more angry at the Fed or more defensive of the Fed. So it really makes it public in a way that is, that is pretty new. But I mean, I do get the point that there is always this pressure on the Fed, always from within Congress too. You've had criticism of the Fed which, coming from Congress, it's a bit more appropriate than from the President because the Fed is accountable to Congress. So it kind of makes more sense that you would, you would see a lot of criticism of the Fed coming from Congress because that's more their role. They have the monetary power that they've delegated to the Fed.

[Joe Weisenthal]

Right.

[Tracy Alloway]

I know you're not in the sort of market coal mines on a daily basis, but I'm hoping, I'm hoping you may nevertheless have an opinion on this because one of the weird things that happened this week when all the headlines about Trump possibly firing Powell started to fly around was the biggest reaction in the market seemed to be in the dollar in the U.S. currency. And we actually didn't see that much movement in yields at least going up, like they didn't start surging. So I guess I'm curious if you're thinking thesis holds that any type of pressure tends to be inflationary because it boosts perceptions of inflation. Why wouldn't we have seen an upward rise in yields, that reaction this week?

[Carola Binder]

Well, it's not that any type of pressure is inflationary. It's that on average, across all of these hundreds of data points I was looking at, on average, pressure was inflationary. This particular case could be very different, I think, partly because there's so much, so much uncertainty about what is Trump actually going to do. It's hard to even follow the news here where he says he's going to fire Powell or no, he didn't, you know, so any kind of announcement you get, I think the markets don't know exactly how to take it right away. And some of the news, right, like was already kind of baked in. Like we've known for a couple of months that President Trump was having this conflict with Chairman Powell. So maybe these most recent announcements are not really that much new news.

[PGIM Representative]

Speaking of alternatives, PGIM's monthly podcast discussing trends and strategies in alternative investing.

[Tracy Alloway]

There's no question that Mexico's preferential position.

[Oracle Representative]

In the new trade policy will drive incremental demand for industrial real estate and will sequentially drive rent growth as well.

[PGIM Representative]

There's more to uncover. Hear the full conversation on PGIM's podcast.

[Bloomberg Representative]

Speaking of alternatives, time for a sofa upgrade. Visit washablesofas.com and discover Annabe where designer style meets budget friendly prices with sofas starting at $699, Annabe brings you the ultimate in furniture innovation with a modular design that allows you to rearrange your space effortlessly. Perfect for both small and large spaces, Anabe is the only machine washable sofa inside and out. Say goodbye to stains and messes with liquid and stain resistant fabrics that make cleaning easy. Liquid simply slides right off. Designed for custom comfort, our high resilience foam lets you choose between a sink in feel or a supportive memory foam blend. Plus our pet friendly stain resistant fabrics ensure your sofa stays beautiful for years. Don't compromise quality for price. Visit washablesofas.com to upgrade your living space today with no risk returns and a 30 day money back guarantee. Get up to 60% off plus free shipping and free returns. Shop now at washablesofas.com Offers are subject to change and certain restrictions may apply.

[PGIM Representative]

Hey, it's Ryan Reynolds here for Mint Mobile Now. I was looking for fun ways to tell you that Mint's offer of unlimited premium wireless for $15 a month is back. So I thought it would be fun if we made $15 bills, but it turns out that's very illegal, so. So there goes my big idea for the commercial. Give it a [e-mail] Switch upfront payment.

[Tracy Alloway]

Of $45 for a 3 month plan equivalent to $15 per month required new customer offer for first 3 months only.

[Bloomberg Representative]

Speed slow after 35 gigabytes of network's busy. Taxes and fees extra.

[Joe Weisenthal]

See mintmobile.com has the damage already been done? This is the sort of question that I'm wondering about, which is that, okay, pressure has existed to some extent, forever. It's become much more of a public spectacle, it's become much more aggressive, et cetera. There is this, I would say, safe assumption that Powell doesn't have that much longer in his term, but that the assumption is that the next Fed chair will be some sort of Capital L loyalist to Trump, that there will be alignment. I forget who it was on TV talking about, we need a new Fed treasury accord. So would you say, like, to some extent, that the glass has been broken here or the glass has been cracked and that the damage has been done even if the Fed legally retains its existing structure, that the Fed going forward will not be the same independent Fed will not be as independent as we've had for the last several decades?

[Carola Binder]

Yes. I think that the damage to the perception of the Fed's independence has already been done. There are really big political divides in how people perceive the Fed. The kind of tradition that one president would reappoint the previous president's Fed chair, even if they were from a different political party. I think that that tradition probably is over.

[Joe Weisenthal]

Yeah. Kind of like Supreme Court nominations, which used to fly through, now are entirely done on political. Like the votes and the confirmation votes are completely political now.

[Carola Binder]

Yeah. But I would say it's not just the fault of Trump since his election, since his most recent election. It's not just that. It's also what was happening during the pandemic and during the high inflation episode in 2021 and 2022 that did a lot of damage as well, because there was so much on both sides of trying to, like, place the blame and saying, was everything the Fed's fault? Was everything the fault of the fiscal stimulus? Was it transit? Was inflation transitory or permanent? That really got things more politicized then, and that's only been exacerbated by the past couple months.

[Tracy Alloway]

One of the other narratives that I've seen this week is this idea that, okay, even if Trump fired Powell and put in place someone who would immediately push for lower interest rates, you wouldn't necessarily get them a. Because of the market expectations which you just described. So people might start pricing in higher inflation expectations, which would move the curve up or steepen the curve, but also because it's not just the Fed chair making decisions, it's a committee, and Trump might not be able to influence the entire committee how do you take into account, I guess the rest of the FOMC members, how do they play into this type of political pressure?

[Carola Binder]

Yeah, so it is monetary policy by committee and different under different Fed chairs. The kind of committee decision making has differed a little, just the norms around it. So whether they like kind of how strong the Fed chair was and making sure that everyone would come to a consensus versus allowing some more disagreement to be public. But yeah, I think the fact that, I mean the fact that the members of the committee have these overlapping terms and pretty long term lengths is part of what gives it independence because it means we don't have a complete turnover of the committee at any given point in time. And there's going to be a lot of continuity there because of that institutional structure. Especially if you get a Fed chair that's kind of external, that's viewed as a loyalist. The rest of the committee may be quite reluctant to just go along with whatever the new Fed chair says if they don't feel like it's the right decision. The Fed, they emphasize all the time that they're data dependent and I think that's the line that a lot of committee members would keep using. The unfortunate thing is we don't know exactly in what sense they are data dependent. Like they don't publish a monetary policy rule that they follow, but they say that they take into account not just the PCE inflation rate and the unemployment rate, but all sorts of other indicators about where the economy is headed and they, they react to all of those. So, so they would. I'm pretty sure most of the committee would try to just stick to the course that they're on even if there were a new chair in place.

[Joe Weisenthal]

It would be really interesting because dissents are very rare and sometimes you get, a lot of times you get no dissent. Sometimes you get one, very rarely you get two in the last. In my career I can't remember any decision in the US that I think ever got more than two dissents. It would be interesting if that norm were broken where the Fed really does not control or have basically get to guide the committee on their preferred path. I want to though like talk about in the broad research, globally, establishing a central independent central bank is politically difficult and some countries attempt to do it by simply outsourcing their monetary policy to the Federal Reserve itself by setting up a dollar peg or a currency board or something like that, because they don't even have the sort of political capacity to establish a truly independent central bank. What are the patterns you see around the World. I'm curious if in your research, when pressure builds on a central bank, is it usually sort of a symptom of a broader domestic political disintegration that's happening where just all kinds of norms are being violated or all kinds of structures are sort of collapsing or deteriorating in some way?

[Carola Binder]

Yeah. Well, to the part about how the central bank independence is set up, sometimes it's because there's already a very strong preference in that country for lower inflation. So they, so then it's kind of easier to set up an independent central bank because they really want low inflation and they're committed to it, which is why it's so hard in the research to say, does central bank independence actually lower inflation? Because you, you have like a reverse causality.

[Joe Weisenthal]

Yeah.

[Carola Binder]

So sometimes that's how it gets set up. Sometimes it's imposed by, like the IMF saying, you know, if you want to keep having our support, there's some things you need to do, and one of them is set up an independent central bank. But then the part about, like, when do politicians start pressuring the central bank? When does that really build up? Yeah, I mean, there was a lot more of the pressure on the central banks around, around crisis times. So I think the financial crisis did erode a lot of trust in institutions and made it more acceptable to pressure central banks. Also, during the 2000 and tens, when inflation was really low, that made it seem more okay. Having higher inflation doesn't necessarily seem like so much of a threat. What we really want is to boost the labor markets, at least in certain countries. So then there was more pressure on the central banks that way. The other thing is also like the fiscal situation. So if there's big, big debts to finance, right. And then there's going to be often pressure for the lower interest rates or to monetize the debt.

[Joe Weisenthal]

Tracy, by the way, just as we're recording this headline from the ap, all this stuff about criticism of the Fed, it turns out. Chris Rugerberg, Josh bulk of the AP reporting much of these costs were associated in 2020 with Trump officials demanding that there be more marble at the Fed instead of glass. So a new wrinkle to the cost of these office constructions.

[Tracy Alloway]

Anyway, you gotta have that marble.

[Joe Weisenthal]

Trump loves marble.

[Tracy Alloway]

Marble and gold. He does have a very Louis XV style, I guess, taste in interior design. Anyway, maybe we should do an interior design.

[Joe Weisenthal]

Yeah, I'm down.

[Tracy Alloway]

I would like that. Okay. Anyway, on a serious note, given those concerns around trusting unelected bureaucrats and the idea that maybe, you know, central Banks started to overstep their traditional roles post 2008 or something like that. What's the best way of, I guess, ensuring that central banks are in some way answerable to the electorate or in some way there's accountability there without sacrificing that independence?

[Carola Binder]

Yeah, I mean, this is a really important topic to me and it's something I focus a lot on in my book and in some of my other research. But I think that making sure that the role of the Fed or the central bank is limited to something like price stability and having a lot of transparency about how they're achieving that is really important. So the Fed has a dual mandate. Having the price stability and the employment side of the mandate gives them a lot of discretion because sometimes those two goals can come into conflict and then they need to just decide, well, what are we going to do? Prioritize right now, the more discretion that unelected technocrats have, the more room there is for people to try to pressure them one way or the other. In my book, I advocate for a nominal GDP or a nominal income target, which I think would help them achieve both parts of that dual mandate, but with a single target that they're going after. And then it makes it really clear at any given point of time, do they need tighter or looser monetary policy? And there's not as much like wiggle room. It makes it easier for them to justify their actions and for the public to say, well, are they doing what they say they're going to do or not? Versus if you have an inflation target and kind of full employment target, then you can always argue kind of for either way. And yeah, so just keeping the role more limited. Not lately, but before COVID there was a lot more pressure on central banks to do even more beyond those kind of two parts of the dual mandate to take on climate change and inequality and issues like that. And I think that those are important things that somebody needs to do, but it's not really the job of the Fed because they're not elected to do that. And those kinds of political topics need to be addressed by elected officials.

[Joe Weisenthal]

One of the funny things I used to think of the 2000 and tens is that had the Fed only had a single mandate, it's not, it's conceivable to me that policy would have been looser if they were continuing to fail on its inflation target. From the downside in those days that, you know, they continued to miss that 2% had they had a nominal GDP target, a nominal income target solely, it's possible, actually that they might have achieved the employment part of the mandate sooner because it would be so sufficient that they were failing to hit that target. Anyway, Carola Binder, really appreciate you coming on. I'm, I'm finding your research to be very fascinating. Happy to have dived into it. So thank you so much for coming on Oslo.

[Carola Binder]

Thank you.

[Tracy Alloway]

Joe. Obviously, a very timely episode to get out. I do think the question you asked about whether or not attacks on central bank independence might be part of a broader deterioration in norms and what's deemed acceptable by society and political society. There is an element of that. Like it does feel like that.

[Joe Weisenthal]

No, like, I think so. Like, I think if you were to look around the world and you were to say, find those examples where there is a lot of pressure or stress on central banks, I think almost always you would find it associated with other things happening in politics that are sort of, you know, the wheels are coming off in some way. Turkey, strikes me, is a great example, a country where the sort of like democratic norms have eroded over time, certainly over the last 20 years, many would say. And which gets to this whole idea, which Carola talked about. Causality is often hard to establish. So you can point to on a line that this pressure on a central bank or a central bank independence period associated with this or that inflation. But whether that's because it was the pressure or because many bad things are going on at the time, it's hard to disentangle.

[Tracy Alloway]

Absolutely. But I guess her broad conclusion that on average this type of political pressure does lead to higher inflation expectations, like it does suggest that if your ambition is lower rates, then maybe this doesn't help.

[Joe Weisenthal]

I mean, here's the thing. We are almost certainly going to get a Fed chair sometime in the next year. Whether it's because Powell has been removed from his term prematurely or or just because at the end the next central banker is perceived as a President Trump loyalist, there is probably going to be a meaningful difference in the the reaction function of the Fed toward faster impulse to cut very naturally. People can assume, therefore, that the future would be all things equal, more inflationary.

[Tracy Alloway]

Very naturally, the natural rate will go up. Okay, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracee Alloway.

[Joe Weisenthal]

And I'm Jill Wiesenthal. You can follow me at the Stalwart. Follow our guest Carola Binder. She's at C Consis. Follow our producers, Carmen Rodriguez at Carmen Erman, Dash o' Bennett at dashbot and Kale Brooks at Kale Brooks. For more Odd Lots content go to bloomberg.com oddlots where we have a daily newsletter and all of our episodes and you can chat about all of these topics 24. 7 in our Discord, Discord, GG Oddlots.

[Tracy Alloway]

And if you enjoy Odd Lots, if you you want Joe to run for the next Fed Chair, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

[Bloomberg Representative]

Every business has an ambition. PayPal open is the platform designed to help you grow into yours with business loans so you can expand and access to hundreds of millions of PayPal customers worldwide.

[PGIM Representative]

And your customers can pay all the.

[Bloomberg Representative]

Ways they want with PayPal, Venmo pay later and all major cards so you can focus on scaling up when it's time to get growing. There's one platform for all business PayPal open grow today at paypalopen.com loans subject to approval in available locations Let your imagination take flight with an AI powered PC from Lenovo. Whether it's creating digital art, designing new software or building a portfolio for a Future career, our PCs are powered by Intel Core Ultra processors to help students unlock smarter learning and unleash their creativity. That's the power of Lenovo. With intel inside, all you have to do is choose the one that fits your passion. Head to lenovo.com to shop AIPCs and find your perfect companion. Plus get 5% off when you create an education account. Every day has a to do list, but adding Enjoy Belvita to yours can help you knock out the rest of it. Belvita Breakfast Biscuits are a tasty and convenient breakfast option when paired with low fat yogurt and fruit that provide steady energy all morning while Belvita Energy Snack Bites give you the perfect mid morning refuel. Best part? They both taste great, so make the most out of your morning with a bite of Velveeta. Pick up a pack of Velveeta at your local store today.