The stage was set for a classic Washington showdown. Yesterday Stephen Miran, one of Donald Trump’s key economic advisers, sat before a Senate Banking Committee to testify on his nomination to the powerful Federal Reserve Board. The President’s relentless campaign to bend the world’s most influential central bank to his will is gathering steam.
For years, Trump lambasted Fed Chair Jerome Powell as a “numbskull” and a “stubborn mule” for refusing to slash interest rates on command. But now the rhetoric has turned to action, with Trump firing the sitting Governor Lisa Cook over claims of mortgage fraud. Enter Miran, an acolyte who has publicly argued for the President’s right to dismiss Fed governors at will, yet who promised in his written testimony to uphold the Fed’s cherished independence.
This dramatic confrontation has sent a familiar shudder through the halls of global finance: central bank independence, they tell us, is under grave threat. The guardians of economic orthodoxy — from central bank governors to mainstream economists and pundits — are ringing alarm bells, warning that political control of monetary policy would be a “very serious danger” to the global economy and would “undermine the very foundations of our democracy”. This has been the mainstream mantra for the past 40 years. The narrative is clear: independent central banks are technocratic bulwarks against the short-term, populist whims of politicians, and their autonomy is synonymous with economic stability and democratic health.
The concept of central bank independence appeared in the wake of the stagflation crisis of the Seventies. According to the Chicago School economists, short-sighted, vote-hungry politicians could not be trusted with the levers of monetary policy: they would be tempted to juice the economy with low rates before an election, risking longer-term inflation for short-term gain. The solution was to hand the keys to the economy to a priesthood of supposedly apolitical and neutral experts — technocrats immune from electoral pressures who could make tough, necessary decisions for the long-term health of the economy.
This idea was institutionalised globally in the Eighties and Nineties. Countries like the UK, Canada, and Sweden granted their central banks statutory independence. The pinnacle of this movement was the creation of the European Central Bank in 1998, designed from the ground up to be fiercely independent with a single-minded focus on price stability. To this day, it remains an unquestionable dogma. As IMF Managing Director Kristalina Georgieva stated earlier this year, “independence is critical to winning the fights against inflation and achieving stable long-term economic growth.” Any threat to it is treated as economic heresy. But this dogma collapses under scrutiny.
The most compelling rebuttal to the panic is also the simplest: the myth of independence was always just that — a myth. As economist James Galbraith noted, the historical record shows that since its inception the Fed has been a creature of the state. Created by Congress in 1913, its powers are granted, limited and revised through legislation. The Humphrey-Hawkins Act of 1978 also subjected it to regular congressional scrutiny. Congress, in other words, has always held the ultimate authority. It appoints the Fed’s leadership and, crucially, has the legal power to mandate policy changes, a threat it wielded in 1982. Former Fed Chair Ben Bernanke himself once conceded that “the Fed will do whatever Congress tells us to do”. The debate thus shouldn’t be about defending a fiction, but about deciding who the Fed should answer to: the
executive — as Trump would want — the legislature, or, ideally, the public.
Moreover, on a practical and operational level, central banks cannot be fully independent from the treasury. The functions of the two have to be closely coordinated on a daily basis to ensure that the policy targets of each can be met. They are two wings of the same government body, not separate entities. This is the case in most Western countries: a former Reserve Bank of Australia governor, for example, noted in 1994 that legislation in most democracies allows the elected government to override the central bank. Independence, in other words, was always conditional, a carefully managed illusion. The only real exception is the ECB — a point we will return to.
Central bank independence may be an illusion, then, but it is one that has proved extraordinarily useful for elites. It has been one of the most powerful neoliberal tools to depoliticise unpopular economic actions, such as austerity or high interest rates, allowing elected governments to divert responsibility to “external” agencies, such as budgetary offices, or to “independent” central banks, for policies that they themselves supported but feared selling to the public.
In Britain and elsewhere, governments are once again accused of “overspending”, and citizens are told that ballooning deficits and rising bond yields leave no choice but to cut spending or raise taxes — even, in some cases, to consider an IMF bailout. But this yet another myth: while fiscal deficits are often linked to bond issuance — seemingly giving private markets leverage over governments — in reality central banks can (and do) always intervene, purchasing bonds themselves and setting yields at will. The real problem lies in the deliberately opaque accounting structures that conceal this fact, perpetuating the illusion of market discipline where none truly exists.
Small wonder the establishment is freaking out as Trump’s actions risk exposing their cynical ruse. Especially since the era of supposedly independent central banking has been a parade of catastrophic failures. These expert technocrats failed to predict the 2008 financial crash. They then spent a decade failing to revive inflation to their targets. And from 2020 onward, they catastrophically failed to see the coming inflationary surge, responding with the most aggressive rate-hiking cycle in decades while failing to bring down inflation.
“Small wonder the establishment is freaking out as Trump’s actions risk exposing their cynical ruse.”
This isn’t just because central banks privileged policies that benefited the financial sector at the expense of the real economy. Ultimately, it’s because their power to steer the economy has been exaggerated. In the past, the Fed could influence the economy through commercial banks. Today, shadow banking and global capital markets dwarf its traditional tools — not to mention the fact that the true drivers of inflation, supply and demand, are largely beyond the control of
central banks. Galbraith put it bluntly: “Fifty years ago, the actions of the Federal Reserve mattered. Today, they do not.” Their policies have often simply exacerbated inequality and fuelled financial bubbles, proving their technocratic expertise is a shadow of the power ascribed to them.
In any case, even if true independence were possible, it would be profoundly undesirable, since the institution would be truly unaccountable. Just look at the only major central bank designed to be truly independent of democratic institutions: the European Central Bank. Whereas in currency-issuing nations, the central bank is effectively dependent on government or representative institutions, that relationship switches in the euro area, where governments are dependent on their central bank.
In the wake of the financial crisis, the ECB revealed itself as a brutally political actor. In 2011, it forced Silvio Berlusconi to leave office in favour of the unelected Mario Monti, by effectively engineering a fiscal crisis by discontinuing the central bank’s Italian bond purchases. Then, in 2015, it arbitrarily shut down the Greek banking system to force an elected government to accept austerity.
In short, by adopting the euro, European nations did not merely relinquish control over their monetary policy to a supranational authority — an unprecedented move in monetary history — but they ceded it to an authority with a clear, elite-driven socioeconomic agenda. This underscores the reality of a central bank that is truly independent of democratic mechanisms.
But even currency-issuing governments are not immune. The fate of UK Prime Minister Liz Truss is a stark example. The mainstream narrative is that the “markets” punished her for an irresponsible budget. The reality, as Narayana Kocherlakota, former president of the Minneapolis Fed, noted, is that “markets didn’t oust Truss, the Bank of England did”. Like Trump, Truss’s real sin was challenging the orthodox narrative and questioning the Bank’s remit, not her admittedly questionable economic policies.
One of her first acts was to sack the Treasury’s top official, a symbol of fiscal conservatism and central bank deference. In response, the Bank of England, by deliberately refusing to quickly quell market turbulence, effectively orchestrated her downfall. Truss, of course, bears responsibility for failing to stand up to the central bank — and for not insisting that it accommodate the policy of the elected executive. It was a stark lesson in how the myth of independence empowers unaccountable institutions to veto the platform of an elected government.
The real debate we should be having, then, is not about preserving a myth, but about redesigning the system for genuine democratic accountability. The advent of quantitative easing proved what critics always said: money is created out of thin air. The urgent question is who controls that process, and for what purpose. Optimally, the central bank and treasury should be formally consolidated. There is no technical reason for one part of the state to “lend” to another.
This would end the obfuscation, make macroeconomic policy fully accountable to voters and refocus our efforts on the policies that truly matter: fiscal, industrial and investment strategies. The implications are particularly stark for eurozone countries: the only way to restore genuine democratic accountability is to abandon the single currency and reclaim economic sovereignty. Until we smash the myth of central bank independence, we will remain trapped in a system where economic power is wielded without responsibility — a system that is not only inefficient but corrosive to democracy itself.
