The Federal Reserve Must Decide Monetary Policy Without Political Pressure

Federal Reserve Chairman Jerome Powell was recently criticized by President Trump, who described him as “very dumb, hardheaded.” In keeping with his political style, Trump favors the popularity that comes with easy access to cheap money—low interest rates. It's important to remember that such low rates can encourage imprudent spending and excessive borrowing, as we saw during the subprime mortgage crisis.

Trump is intensifying his rants by publicly criticizing the cost of the Fed's headquarters renovation.  Policy analyst Ed Mills, at Raymond James, suggests this may “signal the administration is laying groundwork to justify firing Powell.” If he does, Deutsche Bank says bond and currency markets could collapse.

The Federal Reserve monitors statistics—non-farm payrolls reports, consumer price and sentiment indices, employment in public and private sectors, interest rates and lots more to make interest-rate decisions without regard to political party, as reported in a previous  commentary.

The Fed has significantly lowered inflation. “This was notably achieved without raising the unemployment rate,” according to Fortune reporter Paolo Confino. “As prices stabilized and the labor market remained strong, the economy (and the markets) were sent into tumult by the sudden shock of Trump’s tariff policies.” The tariffs, an unusual policy move these days, “kept changing regularly—sometimes even on the same day.”

This situation introduces uncertainty, which investors typically dislike. As a result, markets tumbled and inflation expectations increased, fueling fears among businesses and consumers. This is detrimental to an economy that was previously performing strongly. The Federal Reserve’s goals are to achieve maximum employment, maintain price stability, and keep inflation around 2 percent; as of June 30, inflation was approximately 2.3 percent. Since consumer spending—covering the purchase of goods and services—accounts for about 70 percent of the U.S. economy, a slowdown can lead to lower interest rates. These reduced rates aim to encourage spending and help revitalize economic growth.   

Recently, Trump said, “I’d do a much better job.”

Meanwhile, Powell has declined to cut interest rates.

The Supreme Court has indicated that the president cannot “summarily dismiss central bankers.” Hence, the White House investigation of the Fed's $2.5 billion headquarters renovation.

The Federal Reserve is an independent government agency whose leadership remains stable regardless of changes in the presidency or Congress. Trump’s recent actions represent another attempt to assert political influence over the Fed’s leadership, continuing a pattern—he thinks presidents should influence the Federal Reserve’s monetary policy.

If ever there were a bad idea, this is it. Interactions between presidents and Federal Reserve officials between 1933 and 2016 reveal how presidential pressure has influenced Fed actions—at the expense of price stability. Nixon got there first, in the 1970s with Fed chairman Arthur Burns. Inflation soared in the 1980s, but it’s more complicated than simply blaming Burns. Even though Nixon pressured Burns, an inflation fighter, who “let inflation run rampant,” the financial system at that time was fragile—two big companies and a bank collapsed. Then came supply-side shocks—like the Arab oil embargo of 1973.

This latest salvo at Powell’s leadership, from a president who says he wants more say in setting borrowing costs, could jeopardize Fed independence. One recent study analyzed President Trump’s tweets about Fed— from his presidential campaign in 2015 to 2021. The study found that tweets had a “measurable impact on financial market expectations of future monetary policy.”  Markets believe the president can influence the monetary policy “in a sizable and persistent way.”

The pressing question is: who will Trump choose to replace Jerome Powell now that he appears to be seeking reasons to oust him?

Betty Joyce Nash reported for the Greensboro News & Record and the Hendersonville Times-News before moving to Virginia where she worked as an economics writer for the Federal Reserve Bank of Richmond. She co-edited Lock & Load: Armed Fiction, an anthology of literary short stories that probe Americans' complicated relationship to firearms. (University of New Mexico Press, 2017.)