Why the Fed’s independence matters : NPR

The president of the Federal Reserve, Jerome Powell (Holding Up Hail, speaks with the construction director during a renovations at the Federal Reserve in Washington, DC, Thursday. On the left, President Trump, and between Trump and Powell is the director of the management and budget office, Russell Vought.

Andrew Caballero-Reynolds / AFP via Getty Images

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Andrew Caballero-Reynolds / AFP via Getty Images

President Trump’s television and television conflict with the president of the federal reserve, Jerome Powell, raised concerns about the independence of the Central Bank before this week’s meeting to consider adjustments to interest rates. Although Trump is not the first president to put pressure on the Fed to reduce interest rates, experts say that his impetuous and intimidation tactics are unprecedented.

After weeks to publicly criticize Powell, Trump made a rare visit to the Fed of the Fed of the Fed, DC on Thursday. During a visit to a $ 2.5 billion renovation project, Trump stood next to Powell in front of the cameras, waving a document that declared detailed detailed costs. Powell dismantled his head and firmly pushed the complaint.

Trump himself named Powell to the Fed’s leading post in 2017, proclaiming: “He is strong, he is committed, he is intelligent”, but this month, the president seemed to forget all this, accusing Powell of being “too late” in the drop in interest rates and expressing the surprise that President Joe Biden had “put it and extended it”. (Biden renamed Powell in 2021.) Trump even launched the idea of dismissing the Fed chair, the term of which expires next – a decision that would be legally controversial. Powell himself said he would not move if Trump asks.

“The presidents complained of bad policy, but they were not as aggressive in their attacks against the institution as the Trump administration was,” said Bill English, professor at the Yale School of Management.

Trump “thinks that he can behave in a way that does not respect checks and counterweights that are integrated into our institutions. And one of these checks and counterweights is the federal reserve system,” explains Bob Hetzel, author and former principal economist of the Federal Reserve Bank of Richmond.

The Federal Reserve – The Central Bank of the country – helps maintain economic stability by managing monetary policy, fixing interest rates, promoting stable prices and maximizing employment. In times of crisis, the Fed also serves as a lending as a last resort, providing emergency liquidity to banks and the wider financial system – as it did during the 2008 financial crisis and the COVVI -19 pandemic.

The seven members of the Governors of the Federal Reserve are appointed by the president and confirmed by the Senate to serve 14 -year -old mandates of 14 years. The president is also appointed by the president and must be confirmed by the Senate to serve a renewable four -year mandate. Although the president can be chosen from outside the board of directors, the person must first be appointed and confirmed as a member of the board of directors before assuming the role.

The Federal Committee of the Open Market of the Board of Directors (FOMC) meets eight times a year, including this week, to fix the rate of federal funds, which banks were facing for the loan of the day in the aftermath. The rate is a key engine of economic activity and indirectly influences interest rates on credit cards, mortgages and other loans.

What is the importance of independence nourished?

In the years which followed its creation by the congress in 1913, the independence of the federal reserve was considered essential to maintain credibility on the financial markets and the public, according to Joseph Gagnon, a former Fed economist.

“This is why they have staggered terms for the [board’s] Governors … and the idea that the president cannot withdraw a person, except for the cause, “explains Gagnon, now a principal researcher at the Peterson Institute for International Economics.

Michael Klein, professor of economics at the Fletcher School of Tufts University, notes that if the decisions on the fixing of interest rates are taken collectively by the governors of the Fed Board of Directors, if Powell should bend to the President’s will “,”[we] would have an unprecedented situation if you have a chair considered to be liable to the president and the governors who feel differently. This kind of uncertainty can really harm the economy. “”

The Fed must sometimes make unpopular but necessary decisions, such as the increase in interest rates to slow down inflation – as it did after the pandemic, when the disturbances of the supply chain and the demand for repressed consumers have contributed to an increase in prices.

Today, the force test between Trump and Powell is more precisely an unpopular action plan: the Fed, which concludes its last meeting on Wednesday, has been reluctant to reduce the rate of federal funds of the range by 4.25% to 4.5% because it has not fully achieved its indicated objective of 2%. More importantly, Powell said that he adopted an approach to waiting for Trump’s pricing war, which could lead to higher prices.

Powell said about the Fed last year: “We are not guessing, we are not specifically specified and we do not assume.”

“We do not know what will be the calendar and the substance of any change in policy. So we do not know what the effects on the economy would be,” he also said.

Did the former presidents influence the Fed?

Trump is not the first president to try to influence the central bank, says Klein. “Nixon did a lot of pressure on [then-Fed Chair] Arthur burns to maintain low interest rates before the 1972 elections. “

This pressure on burns over a period of a month, according to a handwritten newspaper held during his years as a chair and evidence of the infamous Nixon bands, included a disclosed threat that the White House would take control of the Fed.

In the end, Burns has dropped interest rates, a decision that economist Burton Abrams told NPR Planet money That it thinks of a “capitulation in Nixon”. Klein says that “one of the consequences of this was … the strong inflation we had in the 1970s.”

It is difficult to know with certainty to what extent Burns was influenced by Nixon or simply thought that he was doing a solid policy that coincided aligned with the White House, says the English of Yale. Most people, he says, think Burns collapsed. Consequently, “Nixon and Burns [are often seen] As an example of the way things can go wrong. “”

Paul Volcker, who became president of the Fed in 1979, is largely credited with the stabilization of the economy after high inflation of the 1970s – largely thanks to a high increase in the rate of federal funds to restrict the money supply.

What would happen if the Fed leaned to Trump pressure?

In countries like Turkey, Venezuela and Argentina, “[we] have cases where central banks are somehow liable to the government. … These lead to very poor economic results, ”explains Klein.

Gagnon, the former FED economist, agrees that “history is full of episodes” of governments that have attempted to facilitate monetary policy in exchange for a few months or a few years of lower and strong growth. But “compromise is always inflation,” he says.

But even if Trump was to dismiss Powell or persuade him to call for lower interest rates, the president’s ability to influence Fed’s decisions on the rates is limited, explains Hetzel, the former principal economist of the Federal Reserve Bank of Richmond.

If a newly named chair had to take control and try to lower the funds when it is not appropriate, this person “will get a lot of dissent from the Fed decision -makers, says Hetzel. “The president’s prestige has just spoken on behalf of the FOMC. And as the chair gets a lot of dissidents, this suggests that the Fed is divided, and it is very discouraging and very disturbing for the financial markets.”

Then there is the inheritance – both Powell and that of the one who becomes the next Fed chair. “Powell desperately wants to be the next Volcker, not the next burns,” said Gagnon.

The same goes for the one who could replace Powell. “A new chair will have to face the fact that if he goes to the central bank in Valhalla, he cannot leave his mandate with inflation. And he will be interested in his own inheritance,” said Hetzel.