Volkswacht Bodensee - Central bank independence 'fundamental' for good policy: Fed official

The Fed has a dual mandate from Congress to act independently to tackle both inflation and unemployment -- primarily by raising and lowering interest rates.

Anything that undermines the Fed's independence could spook traders in the financial markets, who might come to question if it could effectively tackle inflation over the longer term.

Fed governor Adriana Kugler's speech in the Uruguayan capital Montevideo comes just over a week after the election of Trump -- who has previously questioned the Fed's independence and suggested he would like "at least" a say over setting interest rates.

Kugler did not name the Republican president-elect during her remarks, in which she said controlling inflation required a commitment to accept the "tradeoffs and sacrifices" often needed to restore price stability.

"It has been widely recognized -- and is a finding of economic research -- that central bank independence is fundamental to achieving good policy and good economic outcomes," Kugler said.

"It is not sufficient by itself to achieve those goals, but, over time, it is almost always necessary," added Kugler, who is among the seven most important monetary policy officials in the United States.

During the US presidential election race, Trump criticized Fed Chair Jerome Powell -- whom he first nominated to run the US central bank -- and suggested he would not look to reappoint him once his term expires in 2026.

Powell's replacement as chair will play a significant role in setting interest rates, but will still be constrained somewhat by the Fed's decentralized system, which gives regional Federal Reserve banks a say over the level of interest rates.

In response to a question about defending central bank independence from political threats, Kugler said the Fed was "committed" to its mandate.

"We are asked by Congress to commit to this dual mandate, to be objective, to be independent, to be isolated from outside forces making our decisions, to make decisions in the best possible way for the public," she said. "And that's what we do every day."

"That's essentially the best way to proceed, and to continue doing things the same way we have been," she added.

O.Schlaepfer--VB