A Brief History of the Federal Reserve's Independence

By Nick Timiraos Features Dow Jones Newswires

Central bankers have long argued for independence from political pressure. They say it allows them to make unpopular decisions in the economy's long-run best interest, such as raising rates to curb inflation even if it means slowing growth, as then-Fed chairman Paul Volcker did in the early 1980s.

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"It was clear to me, if you looked at the Paul Volcker experience, for example, having an independent Fed in terms of its decisions and credibility was critically important," said former Treasury Secretary Robert Rubin, who in 1993 established a rule within the Clinton White House that the Fed's policy decisions shouldn't be publicly questioned.

The administrations of presidents George W. Bush and Barack Obama maintained that policy, ushering in an unusual quarter-century of independence.

It wasn't always that way. Political pressure on Fed Chairman William McChesney Martin by the Johnson administration and on Arthur Burns by the Nixon administration to follow easy-money policies is widely blamed for the inflation surges of the 1970s.

President Jimmy Carter chose Mr. Volcker for Fed chief to break the back of inflation, which Mr. Volcker did by raising interest rates to sky-high levels, triggering recessions in 1980 and 1981.

Shortly after President Ronald Reagan's inauguration, a White House staffer asked Mr. Volcker if he wanted to host the new president at the Fed. Mr. Volcker said no, nervous about the message it would send, but replied he would be happy to meet with Mr. Reagan anywhere else. They settled on the Treasury Department as a neutral ground.

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Top Reagan officials frequently criticized the Volcker Fed, but the president refrained. "Some of his staff would have liked him to come out fighting -- criticizing the Federal Reserve when things got tough politically, and he just never did it," said Mr. Volcker. Mr. Reagan reappointed Mr. Volcker in 1983 before selecting Alan Greenspan to replace him in 1987.

Mr. Greenspan had a strained relationship with President George H.W. Bush, who had criticized the Fed for keeping rates too high during his 1988 campaign. Mr. Bush ultimately reappointed Mr. Greenspan, but later blamed the Fed for his 1992 re-election defeat.

At their first meeting after his election in 2000, then-President-elect George W. Bush pledged to Mr. Greenspan his full confidence. "We will not be second-guessing your decisions," he told Mr. Greenspan after an introductory breakfast meeting in downtown Washington, Mr. Greenspan later wrote.

If Mr. Trump nominates Fed Chairwoman Janet Yellen to another term, it would extend a tradition. Every president since Mr. Reagan has reappointed the Fed leader in office at the start of his term.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

June 13, 2017 05:44 ET (09:44 GMT)