The Fed's credibility depends on resisting politics, not playing it
At Jackson Hole last month, all eyes were on Federal Reserve Chair Kevin Warsh in his first speech at the Fed’s annual conference. But all thoughts were about the Fed’s rate decision next week. Kenneth Rogoff, a Harvard economist who was at Jackson Hole as a lunchtime speaker, offered this advice to a New York Times journalist: “If they can possibly put it off till after the midterms, it would be…
The Federal Reserve's credibility hinges on resisting political influence rather than engaging in partisan tactics, according to a leading scholar. At the Fed's annual conference in Jackson Hole last month, Federal Reserve Chair Kevin Warsh's opening remarks were overshadowed by speculation about the upcoming rate decision. Kenneth Rogoff, a Harvard economist who attended the event, advised a New York Times reporter that postponing the decision until after the midterm elections would serve the institution well.
Rogoff questioned whether preserving the Fed's independence by challenging President Trump would be more effective than adopting a cautious approach ahead of the upcoming political climate. However, striving to maintain independence through direct confrontation with the president is a misguided approach. A seminal work by Kenneth Rogoff, written in 1983, provides a compelling explanation for why this strategy is flawed.
In his paper, now recognized as foundational to the study of central bank credibility, Rogoff demonstrated through a theoretical model that the overall economic outcomes would likely improve if the head of the central bank were able to function independently, free from political pressure.
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