What’s the beef between Jerome Powell and Donald Trump?
US president Donald Trump wants a looser monetary policy – lower interest rates – to get the economy growing and mitigate the impact of the ballooning US federal debt. Jerome Powell, the chairman of the Federal Reserve, the US central bank, sees his job as to resist that political pressure and is determined to carry on targeting inflation as the best way of ensuring long-term economic stability and growth. It’s an age-old (or at least decades-old) story of tension between elected leaders and “independent” central bankers. But in the case of Trump and Powell, there’s genuine animus and the stakes are exceptionally high. Trump himself appointed Powell (a Republican ex-investment banker) to the job as Federal Reserve chairman in his first term in 2018. But Trump quickly regretted his decision due to Powell’s refusal to bow to political pressure. Within months, the president was publicly attacking Powell as “crazy” for continuing to gradually raise interest rates and unwind America’s quantitative easing.
Why not sack Jerome Powell?
A president can’t sack a Fed chair over differences on monetary policy. He can only sack them “for cause” – meaning malfeasance of some kind. Powell’s term as the Fed governor (though not as a board member, should he choose to stay on) ends in May next year, at which point Trump will no doubt try to find someone more malleable. In the meantime, Trump’s undermining of Powell has become toxic. The Fed has kept borrowing costs on hold at between 4.25% and 4.5% this year, even as other central banks have cut. That’s partly, by Powell’s own account, due to April’s “liberation day” tariffs and their upward impact on US inflation forecasts. Were it not for that fresh negative factor, the Fed “would probably have cut rates [again] by now”, said Powell last month. In response, Trump has become increasingly abusive – attacking Powell as a “numbskull”and “complete moron”.
Why is Trump so angry?
Because the political stakes are unusually high, the US federal debt is unusually high and Trump is an unusual president. “It’s pretty universal having a president who wants lower rates,” says Don Kohn, a former Fed vice-chair. “What’s unprecedented is [Trump] doesn’t want lower rates to goose the economy, [for him] it’s about lowering the cost of the debt. That’s worrisome because keying monetary policy to relieving budget pressures is a sure track towards higher inflation.” Last month, Trump claimed Powell’s reluctance to cut rates – “at least three points too high”, says Trump – was “costing the US $360 billion a percentage point in refinancing costs”. That’s a trillion dollars worth of anger, which has expressed itself in mounting public frustration, including presidential musings on whether to fire Powell, and a tense on-camera spat over the cost of Fed renovations – as Trump apparently hunts for a just “cause” to replace the governor.
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Why does all this matter?
Because it has undermined market confidence in the independence of the Fed and the stability of US policymaking – sending the dollar sharply lower this year and making a bond-market crisis more likely, as investors (fearing their loans would be repaid in a depreciated currency) demand higher interest rates. Last week, in a rare rebuke – albeit one that didn’t name the US, its biggest shareholder – the International Monetary Fund warned that undermining central-bank independence risked triggering a debt crisis and that independent monetary policy is “a cornerstone of macroeconomic, monetary and financial stability”. In the case of the US, that matters to all of us. An increase in US credit risk due to concerns regarding fiscal sustainability could make financial markets excessively volatile.
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Are central banks independent?
Over the past half-century it’s become the norm for central banks to be at least nominally independent in rich-world economies. The idea is that politicians can’t be trusted to run monetary policy because they are too influenced by short-term political considerations. Giving the Bank of England independence was first mooted by Nigel Lawson in the 1980s and finally happened in 1997 under Gordon Brown. By contrast, Germany’s Bundesbank, the first central bank to gain full operational independence (in 1957), was central to the Federal Republic’s relative price stability and economic outperformance. In the US, the Fed has notionally been independent since 1951. But the institution remains haunted by the blunder of chairman Arthur Burns, who was pressured by president Richard Nixon to cut interest rates in the run-up to the 1972 election – ultimately leading to disastrous “stagflation”.
Independence is better, then?
It’s simply a means to deliver superior price stability and economic performance. There is historic evidence, dating from the 1980s onwards, that independent central banks tend to foster greater price stability. But the charge that independence removes democratic accountability became more potent in the wake of the 2007-2008 financial crisis, as banks became more powerful and pursued highly politicised and contentious strategies such as quantitative easing. There has also been much less consensus over the purpose of monetary policy in an era of low inflation and low growth. Why target inflation when the real issue is stagnation? Central banks also struggled to cope with the post-pandemic inflationary shock, further undermining faith in their technocratic omniscience.
So Trump is right?
As with many of his views, there’s a kernel of truth. But any attempt to curb the Federal Reserve’s independence – especially when it comes to rate-setting – would be very bad news for financial markets. As John Authers puts it on Bloomberg, “Independence may be the worst form of central banking – except for all the others.”
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