Bloomberg News
WASHINGTON — A member of the Federal Reserve’s interest rate-setting committee emphasized the importance of the central bank’s independence amid a looming challenge from the Trump administration.
Federal Reserve Bank of St. Louis President Alberto G. Musalem, speaking at an event at the Peterson Institute for International Economics in Washington Wednesday, said that countries with independent but “accountable” central banks tend to see lower inflation and more stable employment numbers.
“Central banks that tend to be more independent can better control inflation and maintain inflation expectations anchored, and that allows them to also support growth in the labor market when needed,” Musalem said.
He noted that the Fed’s independence requires “accountability to Congress and to the American people,” and stressed that the central bank cannot choose its mandated set of goals.
The St. Louis Fed President, who is a voting member on the Federal Open Market Committee this year, added during his speech that the central bank is “100% focused on congressionally mandated current law, the dual mandate of maximum employment and price stability.”
Musalem’s commentary comes amid President Donald Trump’s effort to exert more control over the central bank through the attempted removal of Federal Reserve Gov. Lisa Cook, over unproven allegations of occupancy fraud and vocal criticism of Fed Chair Jerome Powell’s reluctance to lower interest rates. Cook challenged her removal by filing a lawsuit in late August, arguing that the attempted firing is unlawful and threatens the independence of the Federal Reserve.
Regarding the Fed’s dual mandate, Musalem said he sees emerging downside risks to the labor market, while also stressing the fragility of supporting both sides of the dual mandate.
Musalem highlighted that there is a “higher proportion of long-term unemployed workers, rising unemployment rates for demographic groups that are more sensitive to the economic cycle and substantial downward revisions to payroll growth estimates.”The latest employment report showed that employers added just 73,000 jobs in July, falling short of the pace seen in recent months. The Bureau of Labor Statistics also revised down its May and June estimates by 258,000.
“The upcoming preliminary quarterly census may reveal an even lower pace of recent payroll growth through July, core inflation is running closer to 3% than to the Fed’s 2% target, reflecting some tariff effects as a baseline,” Musalem said.
He added that policy should be “forward-looking and based on the evolving economic outlook and balance of risks when the maximum employment and price stability goals are not complementary.”
“This means appropriately weighing the probability of missing on each goal, the potential size of each miss and the different time horizons needed to return employment and inflation to levels consistent with the Fed’s dual mandate,” said Musalem. “Pursuing a balanced approach requires care; for example, putting most of the weight on the labor market goal runs the risk of unwarranted or excessive policy easing, causing a further steeping of the yield curve.
“Those potential outcomes could do more harm than good to the labor market and contribute to more persistent above target inflation,” Musalem added.
Other members of the FOMC have stressed that the Fed must turn its attention to supporting the labor market via lowering interest rates.In a speech Aug. 22, Fed Chair Jerome Powell signaled that the central bank may soon adjust its monetary policy stance, opening the door for a rate cut in September. The FOMC’s next meeting will be held on Sept. 16 and 17.
