Should The Federal Reserve Be Independent? Trump Nominee Questions Necessity

In private comments made to a banking executive last month, one of President Trump's nominees to the Federal Reserve's governing board questioned the need for the central bank to remain apolitical.

Judy Shelton made the remarks during a conversation with Beat Siegenthaler, who works as a global macro adviser for UBS Group AG, at an event in mid-October that took place alongside the International Monetary Fund's annual meeting. The comments came amid pressure from President Trump on the Federal Reserve to lower interest rates to zero or less and ahead of the Fed's decision to drop it's key interest rate a quarter point at the end of the month.

"I don’t see any reference to independence in the legislation that has defined the role of the Federal Reserve for the United States," Shelton told Siegenthaler, according to a transcript of the interview first obtained and reported by Bloomberg.

Shelton's remarks cut against the conventional view within the Fed and among the financial industry that the central bank must remain independent of political considerations to make the most sound decisions for the economy.

Trump has been publicly clashing with Fed Chairman Jerome Powell for months, frustrated at the bank's refusal to cut rates faster and deeper. The president even went so far as to ask whether Powell or Chinese President Xi Jinping was a "bigger enemy" of the United States.

The two met this week to discuss the economy. Trump called the meeting "cordial," but the Fed said afterward in a statement that decision-making on interest rates would be made based on "nonpolitical analysis."

Shelton's remarks came shortly before the Fed announced its third 25-basis-point cut in a row. Minutes released from the meeting showed officials do not anticipate cutting interest rates again unless they see major changes in the economic outlook.

Federal Reserve independence is considered sacrosanct among most lawmakers in both major parties. In a recent Washington Post survey of 16 Democratic presidential candidates, only Vermont Sen. Bernie Sanders criticized the policies being implemented by the Fed.

"The Fed must become a more democratic institution that represents the needs of ordinary Americans and small businesses, not Wall Street billionaires," he said. He criticized the central bank's decision to raise interest rates between 2015 and 2018.

Shelton, who most recently served as the U.S. envoy to the European Bank for Reconstruction and Development, is one of two individuals Trump plans to nominate for Federal Reserve board positions. The other is Christopher Waller, a St. Louis Federal Reserve economist.