Jerome Powell is facing what may well be the most important speech of his career. This week, at the annual Jackson Hole symposium, the Federal Reserve chair must not only defend his policy, but also the very principle of central bank independence.
President Trump has publicly called him a “stubborn moron” and is threatening to fire him. It is a bizarre situation that illustrates precisely why we need an independent central bank.
The political temptation
Politicians always want low interest rates. It is understandable: cheap money means more investment, more jobs, and happy voters. But economics is not a democracy where the majority is always right. Sometimes painful decisions must be made to protect the long term.
That is exactly what Arthur Burns failed to do in the 1970s, under pressure from Nixon. The result? Inflation above 10 percent, which was only broken by Paul Volcker’s drastic rate hikes to nearly 20 percent. Not everyone has learned that lesson. Erdogan recently fired central bankers who wanted to raise rates. The result: inflation above 80 percent and a Turkish lira that lost 82 percent of its value in just five years.
Neutral interest rate as compass
But independence alone is not enough. Central bankers do not need politics to make mistakes. In recent decades they have sometimes kept rates too high, but more often too low, with disastrous consequences. Rates that are too low lead to bubbles, zombie firms, and misallocation of capital. Rates that are too high strangle innovation and growth.
The solution lies in carefully determining the neutral rate—the level of interest at which the economy is in balance, without inflation or deflation. The ideal policy rate should sit just above this neutral rate. Why? It creates an elegant market mechanism.
Companies that grow only in line with the overall economy will not find it attractive to finance themselves with debt, since the cost of borrowing is higher than their growth rate. But companies that can grow faster than the neutral rate through innovation will find it worthwhile. The difference between their growth rate and the interest rate is their profit.
The end of zombie firms
This simple mechanism has two powerful effects. First, zombie firms—those that survive only on cheap money—will disappear. They cannot bear the higher cost of capital and will exit the market, freeing resources for more productive uses.
Second, companies have a strong incentive to innovate. Only by outsmarting the competition can they clear the interest-rate hurdle. This forces creativity, efficiency, innovation, and progress.
The robot central banker
Perhaps it is time for a radical idea: an artificially intelligent central banker. An algorithm that looks solely at economic data, immune to political pressure, media scrutiny, or public sentiment. A system that calculates the neutral rate precisely and consistently stays just above it—no matter who sits in the White House.
Of course, this also has drawbacks. Economics is not only mathematics, and extraordinary circumstances sometimes require human judgment. But given the track record of human central bankers—from Burns to Greenspan to the current generation—it is worth considering.
Jackson Hole as turning point
Powell’s speech this week matters for his personal reputation and also for the principle of central bank independence worldwide. If the Fed caves to political pressure, other central banks may follow. The consequences would be disastrous: inflation, instability, and the collapse of trust in monetary policy.
The irony is that by attacking Powell so openly, Trump has shown exactly why we need independent central banks. Politicians think in election cycles, economies operate over decades. Those two time horizons are fundamentally out of sync.
In the thin mountain air of Wyoming, more is at stake than Powell’s personal legacy. As the attendees put on their cowboy hats and exchange economic theories against the backdrop of the Grand Tetons, they may be shaping the future of capitalism itself. Because if we cannot trust central bankers to rise above the political storm, we may indeed have to turn to silicon and algorithms. The irony would be complete: in trying to remove politics from monetary policy, we would make it as human as possible—by entrusting it to machines.
Han Dieperink is chief investment officer at Auréus Wealth Management. Earlier in his career he was chief investment officer at Rabobank and Schretlen & Co.