I can imagine arguments against institutional independence for central banks, but I think the whole idea that Fed independence is “undemocratic” in a problematic way is, itself, pretty problematic. After all, Ben Bernanke’s not a dictator. He was appointed by the President of the United States and confirmed by the United States Senate, just like a lot of other officials. It’s true that the president can’t just fire him unilaterally. But it’s not clear that George W. Bush’s ability to fire US Attorneys for failing to pervert the criminal justice system for partisan ends served the cause of democracy. Nor do I think it makes much sense to say that the United States is undemocratic for requiring the president to listen to the military advice of professional officers rather than political appointees.
Meanwhile, we have lots of countermajoritarian political institutions in the United States, ranging from the apportionment of the Senate to the filibuster to the workings of the committee system to the electoral college to bicameralism in our legislatures. But we’re still “a democracy” just like Canada and France and India and Japan are all democracies despite having very different political institutions. And given the rest of the political institutions in the United States, it’s not clear what alternative to independence would be more democratic.
We could just let the President set interest rates and conduct monetary policy, but that would be making Fed functions less responsive to congress than the current setup is. Or we could say that monetary policy actions require an act of congress. But congress is countermajoritarian itself and has an enormous status quo bias. Maybe we could have the Fed chair stand for election independently? But to make a long story short, I don’t really see a huge problem here in terms of democracy once you put the Fed in the context of the rest of the American institutional framework.