As President Trump considers the possibility of dismissing Federal Reserve Chair Jerome Powell, Martin Eichenbaum, a prominent economist at Northwestern University, has voiced concerns about such a move. Eichenbaum emphasizes that replacing an independent institution with a political appointee could be detrimental, especially given the current unprecedented debt levels.
Eichenbaum stated, “Monetary policy works best when it is conducted by an institution that is independent and not subject to political pressure. This view is supported by history and formal empirical evidence. Moreover, it is a view widely shared by most macroeconomists and the heads of our largest financial institutions."
He further explained that elected officials often pursue short-term economic policies which may result in higher inflation rates over time. In contrast, an independent central bank can focus on long-term goals like price stability and sustainable growth. "That is the central lesson of the last 50 years," he added.
Eichenbaum warned against political interference in monetary policy due to its potential dangers for the U.S., particularly with the nation's current debt-to-GDP ratio being historically high. He cautioned that without independence, central banks might face pressure to print money to finance deficits rather than implementing necessary fiscal measures.
Professor Eichenbaum's research delves into economic fluctuations and monetary policy effects on business cycles in postwar United States. He holds esteemed positions as a fellow of both the Econometric Society and the American Academy of Arts and Sciences while serving as co-editor of the American Economic Review.