President-elect Donald Trump will have the unique opportunity to appoint up to two members to the Federal Reserve Board of Governors. Doubtless economists will debate the technical qualifications of prospective nominees, but such deliberation will be fruitless without major institutional reforms. To fix perpetual monetary mismanagement, we need a system where strict rules, not the foibles of individual central bankers, are the guardrails of monetary stability.
The problem isn’t finding openings for the “right people.” Democratic-appointed board member Adriana Kugler’s term expires in January 2026. While Chairman Jerome Powell recently said he would not resign, Fed custom would be for him to resign as a board member if Trump decides to appoint a new chairman in 2026, creating an additional vacancy.
Here’s the problem: There’s no such thing as the right people. As currently constituted, central banking is nearly impossible to do well.
The current structure of the Fed is designed for the Platonic ideal of monetary policymakers. Sadly, they don’t exist. Nobody has the knowledge required to manage the money supply or interest rates. Nor do policymakers have an incentive to resist self-interest for the greater good. Runaway inflation on Powell’s watch shows that even highly qualified and well-intentioned central bankers aren’t up to the task.
To restore democratic accountability, we need Congress to put binding monetary rules on the Fed. The central bank adopted an average inflation targeting rule in 2020 yet almost immediately ignored rising inflation to focus on climate change and employment equity. The rule was never more than a voluntary guideline. While the Fed has done an adequate job bringing inflation back down following its previous mismanagement, we shouldn’t praise it for putting out the fire it started. The basic problem remains: The Fed is essentially lawless.
Our search for policymakers with the right credentials and experience is in vain without Fed reforms to handle the problems of faulty information and bad incentives. What we really need are central bankers humble enough to accept that neither they nor anyone else is smart or benevolent enough to micromanage the economy. Humility acknowledges the need for monetary rules, whereas pride insists on bureaucratic discretion.
There are several rules from which Congress and the president could choose. One promising option is a stable-dollar target. There’s no reason to tolerate a 2%-4% dollar devaluation every year. Force the Fed to keep the dollar’s purchasing power constant. If that is too rigid, consider a total-spending target, sometimes called a nominal GDP target. That would prevent future supply shocks, of the kind we experienced under COVID-19, from creating mass unemployment. Inflation would be temporarily higher, however. Ultimately, it’s up to those who answer directly to the people to decide the Fed’s target. Our monetary policymakers shouldn’t get to be judges of their own cause.
A rule-based system limits the ability of the powerful to subvert monetary policy for self-interested purposes. Recall that, in 2019, former New York Fed President Bill Dudley openly called for the Fed to tank the economy to hurt Trump’s reelection chances. A binding monetary rule can prevent mischief such as that by taking certain policy actions off the table.
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Rules also help overcome the fragility of human knowledge by avoiding the difficulties of economic fine-tuning. Instead of top-down tinkering, a monetary rule creates the foundation for markets to stabilize themselves. Credible central banks don’t need to intervene on an ongoing basis. The Fed should pick a basic measure of stability, such as the dollar’s purchasing power, and stick to it. Markets would thrive on the resulting transparency and predictability.
Who runs the Fed matters much less than what it does. When it comes to central banking, good personnel don’t yield good policy. Only by instituting a strict rule can we put money mischief behind us for good.
Daniel J. Smith is a professor of economics at the Jones College of Business at Middle Tennessee State University. Alexander William Salter is the Georgie G. Snyder associate professor of economics in the Rawls College of Business at Texas Tech University and a research fellow at TTU’s Free Market Institute. They are co-authors of Money and the Rule of Law, published by Cambridge University Press in 2021.
This article was originally published at www.washingtonexaminer.com
