Former President Donald Trump to this day keeps banging on the U.S. Federal Reserve in public, especially at its current chair Jerome Powell. Trump’s contentious relationship with the central bank stems primarily from differences over interest rates, a topic he has been vocal about throughout his political career. His critiques, which have escalated over the past few months, call into question the long-established custom of presidential deference to the Fed.
Regulatory agency disruptions
Trump’s history of antagonizing the Federal Reserve is pretty familiar territory. For starters, he doesn’t hide the ball that he wants a low-interest-rate policy. He’s assured that this cuts-and-stimulus combination will supercharge New Jersey’s economy and boost his political fortunes. This preference has driven his enduring controversies with Powell, whom he appointed to run the Federal Reserve in 2018. Since then, their relationship has soured considerably, with Trump recently declaring that Powell’s ouster “can’t happen soon enough.”
The problem is the former president has exerted public pressure on the Fed. This would be a major break from the historical norm of the central bank’s independence. Economists have been warning for decades that interference like this only invites unwanted and unforeseen economic repercussions. “History is littered with examples of countries where political interference at central banks led to spiraling prices and economic ruin,” noted a financial analyst.
Despite Trump’s assertions, Powell has maintained that he remains unaffected by the former president’s critiques. His term as Fed chair expires at the end of next year. In fact, analysts are already predicting over how the changing political climate will influence the successor’s selection.
In recent public comments, Trump has denied that he wanted to dump Powell from his post. But undiplomatic as they are, his frequent attacks risk undermining the crucial respect for the Fed’s independence that keeps it honest and impartial. Sarah Binder, a political scientist, stated, “That’s ultimately the problem. It is perceptions of independence that really matter and that’s what the pernicious effects of the attacks are—they do raise doubts about whether the Fed can be as stalwart as central bankers want to be.”
And yet, the fact that Trump continues to spout his anti-Fed sentiments. Many economists argue that he shouldn’t be shy about saying what he thinks. Joe Lavorgna, the chief economist at SMBC Nikko Securities, went all in on Trump’s perspective. To that last part, he replied “I couldn’t agree more with the president’s sympathies or comments that the Fed has historically been late to the party. This sentiment suggests a shared belief among certain economic circles that the Fed’s actions have not always aligned with timely market needs.
The Federal Reserve’s authority is purposely structured to operate outside of the political process in order to make unbiased, apolitical decisions about the course of monetary policy. Trump’s vocal criticism may challenge this foundation. Mark Spindel pointed out that “things that are given can be taken away,” referring to the delicate balance of power between government entities and independent institutions like the Fed.
Painted on the formerly dark backdrop of Trump’s mismanagement and laissez faire approach to ongoing trade wars are rising economic risks both at home and abroad. In addition, the wars have added to a chaotic and uncertain atmosphere. In response, many are asking Federal Reserve policymakers to provide direction on how to navigate through these stormy seas. Economists like Donald Kohn emphasize that while market reactions can be influenced by political rhetoric, it is too early to declare stability in these circumstances. “It’s a testimony to the market’s response,” Kohn remarked, “but I think it’s way too soon to say that there’s a stability there.”
The political – and economic – tides are turning on this Trump-Powell dance. It remains to be seen how this changing relationship will affect monetary policy and the economy as a whole. With Powell’s term set to expire soon, debates over Powell’s—and by extension the Fed’s—future are sure to heat up.