U.S. President Trump’s criticism of Fed Chairman Powell dominated comments about the Fed, but a more important and urgent debate is underway in a time of current economic policy uncertainty. That is: What is the appropriate role of the Federal Reserve? Has it exceeded its authority in a way that undermines its independence? This is one of the topics raised by the market as "shadow Fed Chairman" and former Fed Director Wash in an important speech to the G30 last Friday.

Wash's core argument is that if the Fed's independence is now questioned, the main responsibility lies with the Fed itself.The Fed has failed to fulfill its core responsibilities of providing price stability in recent years, thus damaging its credibility. The central bank has also deviated far from its monetary policy mission and entered a political field that lacks expertise or justification.

Wash said,The most obvious example is the Fed's involvement in fiscal policy. Regardless of the benefits of quantitative easing during the 2008-09 financial crisis, the Fed's endless bond purchases over the years after the crisis have masked the real cost of capital. By deliberately keeping long-term interest rates at low levels,The Fed actually subsidizes government deficit spending by artificially reducing borrowing costs. It was not until a few years ago that the cost of federal fiscal revenue became more obvious as the Federal Reserve had to raise interest rates to combat inflation.

The historic Fed-Treasury Agreement in 1951 was reached to clearly distinguish their respective responsibilities. The Federal Reserve is responsible for monetary policy and the Treasury Department is responsible for finance.This division of policy has often been ignored since the 2008 crisis。

Wash added,The Fed also strolls to asset allocation and controversial political issues. Long after the housing crisis ended, the Federal Reserve purchased mortgage-backed securities to subsidize the real estate market. In 2021, as Democrats take control of Congress and the White House, the Fed caters to progressive political priorities about climate change and even appears to target unemployment rates for specific population groups.

All of these are essentially political issues that are reserved for the government, he concluded.The more the Fed targets such priorities as monetary or regulatory policies, the more it will go into political disputes and attract politicians to question its independence. Powell has regressed from these efforts in recent years, but the damage has been done.

Wash pointed out and warned the danger of politicization of the Federal Reserve is correct. It is widely reported that Wash was also considered when Trump chose the Fed chairman in his first term, and perhaps he would be considered again in Trump's second term.

Not because his speech would make him popular with central banks and media elites around the world, but Wash is giving good advice to Fed officials and other central bank governors — at least if they want to regain the trust lost by the public and avoid serious challenges to their monetary policy independence.