Fed must resist pressure on its independence
Lena Dräger, Research Director of the Monetary Macroeconomics Group at the Kiel Institute, comments on the expected decision by the US Federal Reserve to keep its key interest rate unchanged:
“Monetary policy in the US is at a crossroads, and the Fed must now do everything in its power to defend its institutional independence from the government. In early January, the rising political pressure on the Fed reached a new peak when it was announced that the Department of Justice had launched an investigation into Fed Chairman Jerome Powell, allegedly due to discrepancies in the renovation costs of the central bank's headquarters. Jerome Powell responded with a widely regarded video message portraying the charges as a political intimidation tactic aimed at getting the Fed to cut interest rates. Against this backdrop, the markets will be paying particular attention to whether the Fed is able to make monetary policy decisions based on its mandate and economic data.
The data show that keeping interest rates steady is currently the right decision: US inflation is persistently above the 2 percent inflation target. In addition, there is a high risk that the inflation rate could rise further in 2026—because customs duties on imports have not yet been fully passed on to consumer prices, or because labor costs in service sectors are rising due to declining immigration and the deportation of immigrants. This would also mean that the labor market is less strained than the decline in job growth rates recently suggested.
In order for the Fed to perform its task well in this turbulent environment, it must not only resist external political pressure. For its monetary policy to be highly credible, it also needs the broadest possible consensus within the Federal Open Market Committee (FOMC), the Fed's monetary policy decision-making body. Recent monetary policy decisions have been characterized by increasing dissent. The political dimension therefore already appears to be playing a role in the FOMC's discussions. This makes it all the more important to achieve the highest possible level of agreement within the FOMC in the final months of Jerome Powell's term of office, while at the same time basing monetary policy decisions firmly on economic data relating to the US economy.”
