The federal reserve undoubtedly saved the United States from a recession in 2024: the president of the Fed, Jerome Powell, calibrates interest rates to gradually reduce inflation without triggering an acute slowdown in economic growth.
However, President Donald Trump is not satisfied with Powell’s performance. Thursday, one day after the Fed decided not to reduce interest rates, Trump called Powell as “an idiot, who has no idea” on his social platform, Truth Social.
Trump wants to reduce interest rates because he thinks high rates are no longer necessary to check the price increase. Inflation fell to less than 3%, but it threatens to increase again due to prices.
But Powell has a complete license to ignore what Trump thinks. The Fed and the President are supposed to act independently so that the country’s macroeconomic policy can be isolated from political concerns.
This is why the former presidents have largely – did not always think – away from commenting on the decisions of the Fed, even when they had political incentives to do so.
Former President Joe Biden was reluctant to publicly criticize the FED and repeatedly stressed its independence, postponing its judgment on interest rates for a period of high inflation after the Pandemic COVID-19.
But Trump’s most recent attack on Powell was only the last in a long series of his attempts to influence the Central Bank. Trump recently nicknamed Powell, which he named in 2017 a “major” who was “too late and bad” on inflation. He has already called the Fed itself “crazy”, “loco” and “a problem larger than China”. And he has repeatedly sought to dictate the Fed policy: “This is the ideal time to reduce interest rates,” he said last month.
However, independent central banks have a much better assessment than those governed by political interests. Politicians are encouraged to stimulate short -term prosperity, even to the detriment of the long -term economic prospects of a country, because they are liable to voters of the regular elections. Independent central bankers, on the other hand, can afford to take a longer opinion.
This approach reflects the understanding that “the brand of a successful country in the modern era was an independent central bank”, as the vice-president of Goldman Sachs Group Inc., Rob Kaplan, said in an address last month.
The Fed has already faced political -opposite winds. But the extent to which this administration seeks to mingle from the Fed policy is unprecedented and could potentially exacerbate the already increased economic uncertainty from Trump prices.
The former presidents did not so openly disputed the Fed
The former presidents disagreed with the Fed in some notable incidents – but they did not vocalize their concerns as publicly and cheeky as Trump.
Former President Richard Nixon joked by saying that even if he respected the independence of the Fed, he hoped that the president of the time, Arthur Burns, “would conclude that my opinions are those which should be followed” and repress interest rates in the early 1970s.
Some historians theorize that Nixon has exerted more explicit pressure on private burns and that the Fed chair finally gave in to this pressure, allowing inflation to become uncontrollable. But if Nixon did, he never talked about it publicly.
In the early 1980s, the former president of the Fed, Paul Volcker, aggressively attacked interest rates to temper the inflation crisis that Burns began, triggering a recession. Former President Ronald Reagan never publicly criticized the Fed during this period, but made his calendar known.
Volcker recalled in his memoirs that in 1984, he was called to a private meeting with Reagan in which the president ordered him not to increase interest rates before the November elections. Volcker, “amazed”, wrote that he came out without saying a word, and it was the last that he heard about it.
For the most part, however, republican presidents and democrats, from George W. Bush to Barack Obama, respected the independence of the Fed and refused to comment on its monetary policies.
“One of the characteristics of our economic strategy was a respect for the independence and integrity of the federal reserve,” said former President Bill Clinton in 2000.
Confidence in the Fed depends on its operational independence
Technically, the Fed is not completely independent. The Fed authority arises from the law of the Federal Congress Reserve, which legislators have changed over time. The president also appoints the Fed Governors’ Council, which the Senate confirms.
But there are good reasons for the congress and the president to keep the Fed at the length of the arm.
The stability of the American financial system is based on the perception that the Fed and its council of governors, with their vast economic expertise, control the levers of monetary policy and do not respond to short -term political interests. This allows the Fed to focus on the country’s long -term economic well -being – which could sometimes require an increase in interest rates to cool inflation – rather than more instant economic relief than politicians could require.
If Trump’s attacks on the Fed continue, this will only like the struggle of the Americans who were already struggling with an accessibility crisis.
Research has shown that the independence of the central bank corresponds to a long -term reduction in annual inflation, even in advanced economies.
It’s good for American consumers, companies and foreign investments.
The attacks on the independence of the Central Bank, on the other hand, can lead to the fact that the former president of the Fed, Ben Bernanke, described in a speech of 2010 as “unwanted boom-bust cycles which ultimately lead to a less stable economy and to higher inflation”.
There are many examples of countries that have suffered economically after their central banks have been co -opted by political interests.
Take Venezuela, where the country’s authoritarian leaders, Hugo Chávez and Nicolás Maduro, ended the independence of the country’s central bank and ordered him to print more money to finance government deficits during the 2000s and early 2010. What followed was a hyperinflation period, where prices increased two -digit points per month. While their economic prospects are dried up, nearly 8 million Venezuelans fled the country looking for opportunities elsewhere.
Turkey also plunged into an economic crisis in 2022 after President Recep Tayyip Erdoğan exercised greater control over the central bank and has been pressure to maintain low interest rates. Consequently, inflation reached a 20 -year summit, reaching 61% in April 2022. The Turkish LIRA collapsed in value, and the country was forced to implement capital controls – restrictions on the movement of money in and outside the country – to prevent it from falling more.
The United States does not have to follow the path of Venezuela and Turkey.
The Fed is set up to respond at a moment like the present: Trump’s prices threaten to raise inflation, and the Fed has the power to increase interest rates or keep them at their current level to mitigate inflation. But if Trump was in charge, he clearly indicated that he would reduce interest rates, which could increase even long -term prices in the long term.
Trump seems to have changed his mind on the test to dismiss Powell for the moment. But if its attacks against the Fed continue, it will only like the struggle of the Americans who were already struggling with a crisis of accessibility.
