ECON 101
The Federal Reserve and policy independence Why the fate of Jerome Powell and his successors matters
By Robert Eyler I n monetary policy circles, there was about 25 years of focused research on how independent central banks are, should be, and what independence (separate from political decision making) for a central bank may mean for both the economy’s performance, as well as for the smooth functioning of financial markets. In the mid-1990s, much of this research slowed due to two general changes in macroeconomics: (1) a change to central banking that was more holistic in terms of combining classic interest rate policy with yield curve shaping; and (2) the inflation episodes of the late 1970s and 1980s providing lessons about inflation bias in monetary policy and some of the ills that come as a result. The first figure shown here shows the predictability of monetary policy changes as seen through the lens of the Federal Funds Rate (the effective rate at which lenders lend and borrow from each other once the Federal Reserve sets the policy range). Notice the shaping and long-term predictability of its shape. A sharper
In 2025, we are now back to questioning how independent central banks can be, with questions around how the transition beyond Jerome Powell will take place. Initially, the discussion was when his term ends in 2026; summer 2025 has led to some speculation and explicit threats that he will be removed by presidential edict and replaced (due to the high likelihood of a presidential appointee
making it through Senate confirmation) with someone who will take monetary policy orders from the White House. Now, it is good to remind readers that the Federal Reserve is governed by a board of directors for which Jerome Powell is the chair, and a broader committee makes monetary policy decisions, not just one person. However, stacking the Federal Reserve Board with
focus went onto inflation control, especially as the treaty that created the Euro Currency area had explicit inflation rules with multiple countries giving up their power to control local, short-term interest rates (and later due to quantitative easing and tightening, longer-term bond rates also). The European Currency Area created a governance set-up
political lackeys may be a quiet aim of the current administration; creating a contentious atmosphere in U.S. monetary policy would have adverse, global effects on financial markets. Monetary policy (when functioning well) is a game of economic forecasting and uncertainty reduction if domestic
Federal Funds Rate, January 1982 to May 2025, Monthly Average, Percent Yield (Shaded Areas = Recessions)
that was similar to the U.S. Federal Reserve, with each country as a “district” and using the old central banks as district banks. This change, completed in 2002 but started in 1999, augmented central banks' independence by force.
18 NorthBaybiz
September 2025
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