Trump’s Plan to Enslave the Fed Will Decimate the Economy

The agency's hard-won independence has helped curb inflation

(The UnPopulist illustration)

The Federal Reserve might be the most important domestic institution in the federal government, with powers to guide the economy and affect the fortunes of not only 335 million Americans but untold numbers of nations and people around the world. It’s also one of the most independent agencies in Washington—which is precisely why, if he wins a second presidential term this November, Donald Trump plans to make it his servant.

Trump as the Head of the Fed

In April, The Wall Street Journal reported that Trump intends to remove Jerome Powell as Fed chair before his four-year term ends in 2026—going beyond what past presidents believed they had the authority to do. But Trump’s ambitions are grander than just making a change at the top. Reports the Journal:

Several people who have spoken with Trump about the Fed said he appears to want someone in charge of the institution who will, in effect, treat the president as an ex officio member of the central bank’s rate-setting committee. … Under such an approach, the chair would regularly seek Trump’s views on interest-rate policy and then negotiate with the committee to steer policy on the president’s behalf.

Among the ideas is giving Trump a seat on the Fed’s board of governors, which decides monetary policies. 

Trump chose Powell to lead the Fed but seemed shocked that his appointee didn’t eagerly fulfill his every wish. When the Fed raised interest rates in 2018, the president reacted as he usually does when he doesn’t get his way. “The Fed is going wild,” he fumed. “I mean, I don’t know what their problem is that they are raising interest rates … it’s ridiculous.” Even when the Fed cut rates three times in 2019, Trump continued his fusillade of insults. He wanted rates reduced to zero or below. Since Powell declined to appease the White House, a reelected Trump will do his best to bring the Fed under his thumb from the start.

Fed Independence: A Hard-Won Tradition

The central bank has long enjoyed immunity from direct control by elected officials. The president appoints the seven Fed governors to staggered 14-year terms and names the chair for a four-year term, all subject to Senate confirmation. Congress has established the Fed’s responsibilities, among them the “dual mandate” of maintaining stable prices and maximum employment. But the central bank is empowered and expected to act independently, using its best judgment to meet those goals.

Joe Biden has stressed his respect for the Fed’s autonomy, and Barack Obama, George W. Bush, and Bill Clinton typically refrained from criticism even when they were dissatisfied. Alan Blinder, who served on Clinton’s Council of Economic Advisers, recalled, “Every time [Fed chair Alan] Greenspan raised interest rates, Clinton raged inside the White House. But to his everlasting credit … this was all private.”

But this hands-off approach wasn’t always observed. Lyndon B. Johnson grew so angry over the Fed’s tight monetary policy that he summoned chairman William McChesney Martin to his Texas ranch and exclaimed, “Martin, my boys are dying in Vietnam, and you won’t print the money I need.” Richard Nixon chose Arthur Burns to lead the Fed, trusting that he would keep interest rates low to facilitate his reelection, and, under ceaseless pressure from the president, Burns did—contributing to the outbreak of high inflation in the 1970s. It was Paul Volcker, named Fed chair by Jimmy Carter, who established the precedent that the Fed could and should act with unflinching resolve, indifferent to the needs of politicians. Under him, the Fed curbed the growth of the money supply, boosted the federal funds rate to nearly 20%, and broke the back of inflation. Carter, of course, lost his reelection campaign.

Trump wants to establish a new regime, under which the Fed would take orders from the president. This would ensure that the Fed is guided by someone with neither a grasp of basic economics nor a respect for the institutional integrity of the central bank. Giving the White House a major role in monetary policy would be a terrible idea, even under a president less capricious and economically illiterate than Trump.

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Stopping a Rogue Executive from Abusing the Massive Powers of the Presidency

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The Fed was created in 1913 with the goal of enhancing financial stability, a response to a series of banking crises dating back to the 1840s. Until that point, writes University of Chicago economist Thomas Coleman, the U.S. had “a banking system that was unique among the developed world and uniquely fragile and dysfunctional.” The Fed was granted autonomy precisely because most everyone understood the hazards of turning monetary policy over to politicians, who are invariably focused on the next election. The independence allows the Fed to act with the long-run interests of the economy in mind, even when it means inflicting short-term pain in the form of higher unemployment or more business failures. If the Fed were subject to micromanaging from the executive branch, it would arguably compromise its ability to carry out its statutory mandate.

Nor is there anything undemocratic about this arrangement. Congress and the president have put it beyond their constant meddling, but they retain the ultimate authority, which serves as a check on the Fed. Shortly after being appointed chair in 2018, Powell said: “I’m going to wear the carpets of Capitol Hill out by walking those halls and meeting with members. … I want them to think that we’re responsive to their concerns and their thoughts and that we’re here to be as clear as we possibly can.” If the Fed were to abuse its power, Congress could strip it of its independence, as Fed governors don’t need to be reminded. 

But the arrangement has its advantages for elected officials, who can disavow responsibility when monetary policy creates discontent. They are free to bash the Fed to their heart’s content, without the risk that their demands will actually affect anything. A president who made the Fed his servant would have no one to blame when the economy falters. 

Protect the Fed from Trump’s Meddling

Trump has already shown he is not a wise steward of the economy. He slapped heavy tariffs not only on China but on Canada, Mexico, and our trading partners in Europe, added $8.4 trillion to the national debt (with the help of Congress), and slashed legal immigration. Cato Institute scholar Scott Lincicome says Trump’s biggest failure was generating endless uncertainty. Under Trump, he wrote in 2020: “formal U.S. economic policy has all too often resulted from frantic, messy attempts by beleaguered government officials to ‘backfill’ disconnected policy trenches dug by presidential tweets. That’s no way to run economic policy, and it shows.”

In 2019, bitterly castigating the Fed for raising interest rates, Trump wanted to saddle the board of governors with a pair of unqualified loyalists, Herman Cain and Stephen Moore, who could be counted on to champion his desires. Trump backed off only when it became clear that the Republican-controlled Senate wouldn’t confirm either. In his criticisms of the Fed, Trump made it plain that his own interests should be its highest, if not only, priority. A president who would use the Justice Department to persecute his enemies, as Trump has vowed to do, would undoubtedly try to think of ways to make Fed policy serve his interests, political or commercial.

An optimist can hope that if Trump were able to assert control over the Fed, he’d be constrained by the fear of cratering the stock market. Though he may not care about the long-term health of the economy, he does care about immediate developments that make him look bad. But it’s not a foregone conclusion that markets would react negatively to, say, a politically-motivated cut in interest rates. Lower rates mean that corporations have lower borrowing costs and consumers have more money to spend, both of which tend to boost stocks. 

Nor does inflation necessarily depress the Dow: Under the Biden administration, surging prices haven’t prevented a stock market boom. There are, however, times when conditions call for the Fed to raise interest rates, even if the markets react negatively—something Trump would undoubtedly reject. Martin is famous for saying the Fed’s job is “to take away the punch bowl just as the party gets going.” That kind of far-sighted discipline is not something anyone associates with Trump.

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The Perils of Right-Wing Economic Populism: A Conversation with Economist Ryan Bourne

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A multitude of evidence argues against curtailing the Fed’s independence. As a rule, the more independence a country’s central bank has, the lower the inflation rate—as documented by Michael Klein, an economist at the Fletcher School of Diplomacy at Tufts University. “In recent decades,” he told me, “there has been a big move across countries to make central banks more independent, and that’s one reason we’ve seen less inflation compared to the 1970s and ‘80s.” Kristalina Georgieva, managing director of the International Monetary Fund, analyzed IMF studies that specifically focused on central banks and concluded that maintaining their independence was preferable across a number of metrics. For example, one study that looked at a number of central banks from 2007 to 2021 found that “those with strong independence scores were more successful in keeping people’s inflation expectations in check, which helps keep inflation low.” In another study, this time tracking 17 central banks in Latin America over the past century and focusing on their “decision-making independence, clarity of mandate, and whether they could be forced to lend to the government,” concluded that “greater independence was associated with much better inflation outcomes.”

Trump, however, thinks the president should be all-powerful, particularly over anything connected to the executive branch of government. During his term in office, he found it impossible to accept the Fed’s insistence on charting its own course, and he’s determined not to let it happen again. Presidents like Johnson and Nixon have shown the perils of White House intervention in monetary policy, but Trump’s heavy-handedness would put them to shame. And once the precedent is set, the Fed’s independence isn’t something that will automatically materialize again; one could easily imagine Democratic successors using the central bank for their own political purposes.

Operating independently, the Fed makes its share of mistakes. But if Trump manages to take it over, Americans will learn the hard way how good we had it.

© The UnPopulist 2024