“One could argue that those who want the Fed to allocate credit, help fund a Green New Deal, engage in ‘helicopter drops,’ and so on are well intentioned,” explained James A. Dorn, vice president for monetary studies, in his opening remarks. “However, the real issue is whether such actions are consistent with long-run price stability and the rule of law.”

Political pressure on the central bank isn’t new, but it has typically revolved around policy areas within the Fed’s traditional purview. Increasingly, however, politicians have begun to entangle the Fed in issues seemingly far removed from monetary policy, such as climate change and social justice, as well as in the interplay of fiscal decisions made by legislators. This has raised difficult questions, including the proper scope of the Fed’s role, which is largely outside the democratic process, and the importance of maintaining a separation between monetary policy and fiscal policy.

In the conference’s keynote address, the University of Chicago’s Raghuram Rajan warned that these demands threaten to take the Fed down a “road to dominance” with outsized influence over a wide range of policy issues, even as the extraordinary response to the pandemic has made it essential to refocus on the core purpose of maintaining price stability.

“A fundamental hope for monetary outcomes is that after a transitory period of inflation, hopefully short lived, this time will not be different. In other words, we will go back to the benign pre-pandemic world. Given the changes that have occurred, this seems somewhat optimistic,” Rajan explained.

Throughout the day, a series of panels that included both academics and policymakers were moderated by some of the field’s most notable journalists: Greg Ip, chief economics correspondent at the Wall Street Journal; Jeanna Smialek, Federal Reserve and economics reporter for the New York Times; and Edward Luce, U.S. national editor of the Financial Times.

In a discussion about so-called fiscal dominance and the return of inflation, Fernando M. Martin of the Federal Reserve Bank of St. Louis discussed whether the current sharp increase in inflation is being driven more by fiscal decisions than monetary policy decisions. “Massive assistance programs, deficits that were about $3 trillion, and debt that surpassed 100 percent of GDP” were all among the aspects of the government’s pandemic response. “The result is that over the course of the pandemic, inflation has averaged 3 percent, well above the target.” As Martin explained, high government spending has driven up demand, and prices have risen in response. The biggest price increases have been in some of the goods that have also seen the largest increases in supply, pointing to fiscal-driven demand as the cause.

In the lunchtime address, Barry Eichengreen of the University of California, Berkeley, author of The Populist Temptation, explored how the rise of anti-elite populism has presented new challenges to central bank independence, both in the United States and around the world, in ways that “tend to have an inflationary bias.”

In another discussion about the possibility of expanding the Fed’s legal mandate, which has long been defined as price stability and maximum employment, Otmar Issing, former chief economist at the European Central Bank, explained how central bank independence has been a relatively recent innovation. This development arose even though “the independence of the central bank seems to contradict core principles of democracy.”

But when this lack of independence resulted in high inflation, the fears of independent technocrats unconstrained by elected politicians receded and a period of relatively low inflation ensued. Now, the debate has been reinvigorated, not just on populist grounds, but also among economists, who are reconsidering to what degree monetary and fiscal policy can be truly independent of each other.

With a changing political landscape and the unprecedented tumult of the COVID-19 pandemic, the Fed’s role is becoming more heavily disputed than it has been in decades. These and other discussions continue the Annual Monetary Conference’s tradition of providing timely and thoughtful responses to the most pressing contemporary issues in Fed policy.

Full videos of the addresses and discussion panels at the 39th Annual Monetary Conference can be found at cato​.org/​e​v​e​n​t​s​/​3​9​t​h​-​a​n​n​u​a​l​-​m​o​n​e​t​a​r​y​-​c​o​n​f​e​rence.