As President Trump doubles down on the Federal Reserve’s interest rate policy, tensions are heightened between the Trump administration and the Federal Reserve. In response to troubling inflation indicators for the United States economy, Trump’s saying expectations are now being met — the lack of 3 percent growth year on year.
Citing social media as his platform of choice, the President has publicly shredded Jerome Powell, the very man he personally selected to chair the Federal Reserve in 2018, saying: “His termination cannot come fast enough!” In Trump’s eyes, increasing interest rates equates to financial warfare, and he is determined to push the Federal Reserve towards a more business-friendly approach.
The Fed’s Stance: A Patient Approach
Even so, the Federal Reserve chair Jerome Powell has signaled a diverging path. Few days ago, he was quoted saying that the Fed is not planning to ease off interest anytime soon, mainly due to the unpredictable nature of the markets that they have to deal with. “As for now, we can afford to be a bit cautious in waiting to see how the markets unfold in order to gain clarity before we adjust our policies” is what Powell said, apparently suggesting that the central bank is likely to stay where it is.
Defending the Divide: The Crippling Independence of the Fed
The focus of the White House and the Federal Reserve have been clashing making the independence focus of the central bank very visible. Answering the question directly concerning the Trump’s public comments on the Federal Reserve and monetarism as a tech-neutral institution, Goolsbee – the Federal Reserve Bank of Chicago strongly defended that statement. “I hope to god we don’t end up in a situation where we start to lose credibility over questioning our monetary independence,” Goolsbee responded highlighting striking reasoning why the Fed must retain their independence from government oversight.
The Brookings Institution further expands on the reasoning for the Fed’s independence, noting that politicians tend to favor lower interest rates which ease access to credit. This primarily stimulates economic activity. However, this approach carries the considerable danger of inflation which could destabilize the economy in the future. The Fed is designed to be free from political day-to-day decision influence in order to achieve fundamental economic goals, such as protecting long-term economic health and full employment, inflation being a side consideration.
The Legal Framework: May Trump terminate Powell’s position at will?
Trump’s public dissatisfaction with Powells policies has been made clear, although legally, openly opposing policy decisions made by a sitting Fed chair on monetary policy does challenge the boundaries of acceptable conduct. On this dispute, Powell had this to say, “Our independence is a matter of law.” which implies that the Federal Reserve is politically and operationally insulated, particularly regarding policies in economic decisions devoid of partisan influence, detaching government decision making from the political calendar.
A Looming Clash: The Stakes for Economic Stability
The Fed Chair and the White House are at odds, which could spell trouble. Economists consider the independence of the Federal Reserve to be one of the bedrocks of monetary policy. Any real or imagined political meddling might hobble the Fed’s credibility with the markets and provoke instability. With the president constantly complaining, this feud knows no bounds and is a serious problem from a financial market perspective.
