Former US Federal Reserve chair Jerome Powell’s fierce defence of central bank independence is not surprising. Indeed, given the repeated onslaughts on the Fed’s independence by US President Donald Trump and the context in which those remarks were made, any other topic would have been a surprise.
The occasion was Powell’s acceptance speech on being conferred the 2026 John F. Kennedy Profile in Courage Award. The citation commends him for standing firm in the face of “years of personal attacks and threats from the highest levels of government,” noting that he “refused to let political forces dictate monetary policy.”
While Powell was at the Fed’s helm, till last month, America’s central bank was at the receiving end of White House ire for not easing interest rates. “Central banks make monetary policy under high uncertainty,” he said.
They could occasionally err, but their decisions are based only on their best economic analysis of what would benefit the people they serve. Most importantly, they “do not take into account the fortunes of any political party or politician in making those decisions.”
The reason the Fed has been able to resist political pressure is that it is protected by institutional mechanisms that mandate its independence. These enable it to withstand ‘stress tests’ of the kind it was subject to.
Powell’s speech may have particular relevance for the US today. But his words ring equally true for all central banks globally.
Legal safeguards that allow the “non-political conduct of monetary policy” are key to ensuring that the decisions taken are sound. Over time, this secures the central bank’s credibility and helps assure the economy not just price stability, but cheaper credit as interest rates bear a lower inflation-risk premium.
Yet, ‘time inconsistency’ can be a burden. The time horizons of elected governments and non-elected central bankers are rarely in synchrony. Governments are typically driven by the compulsions of electoral cycles, while central banks focus on sustainable prosperity over the long-term.
To take a cricket analogy, it is like a T20 match versus Test cricket. Governments are good at the former, central banks at the latter.
In the Indian context, it was former Reserve Bank of India (RBI) governor C. Rangarajan who first raised the issue of central bank independence. In his 1993 Kutty Memorial lecture on ‘Autonomy of Central Banks,’ he argued that a prerequisite for RBI’s freedom to pursue monetary policy independently was a clear severance of the umbilical cord between the Centre and central bank—by ending an opaque practice of RBI funding the central government directly.
Done in 1997, this set the ball rolling on RBI’s independence.
Today, under the flexible inflation targeting regime adopted in 2016 by virtue of an amendment to the RBI Act of 1934, India’s central bank has more operational space.
But we should go further. Taking a cue from the US, we could consider making the appointment of the RBI governor and MPC members subject to confirmation by Parliament. Right now, these are executive decisions.
We could also require the governor to testify before the House at regular intervals. And last but not least, we could require the publication of RBI’s mandatory explanation letter to the Centre in case it fails to achieve its inflation target for three quarters on a trot.
We have far too much at stake not to safeguard the “priceless asset” that central bank credibility is.