Introduction to the Trump-Powell Saga
US President Donald Trump has created a storm not just in other economies but the US economy as well. There is barely a day when the President does not issue statements that have deep implications for either the US economy or the global economy. One such statement is Trump wanting to fire Federal Reserve chair Jerome Powell.
The Trump-Powell Saga Unfolds
Powell was appointed as a member of the Federal Reserve Board (FRB) in 2012. He was made the chair of FRB in 2018 by none other than Donald Trump who was serving as President during his first term (2016-2020). At that time, Trump criticized then FRB Chair Janet Yellen and appointed Powell amidst huge hype. He was soon unhappy with Powell and was openly tweeting against Federal Reserve policies ahead of his bid in 2020 re-election.
The Role of Central Bank Independence
The ongoing tussle has also brought to fore the ever-important question of central bank independence. Over the years, central bank independence has become a very important topic of discussion and contention. The government should have goal independence wherein it gives the central bank economic goals to achieve. The central bank should have instrument independence to achieve the stated goals. This goal independence and instrument independence has become the cornerstones of research on central bank independence.
A Brief History of Fed Independence
American history is littered with conflicts between fiscal and monetary authorities. In 1913, the Federal Reserve was established and remained under the shadow of the government for the next four decades. This was partly due to the fact that central banks being independent was an alien concept with government dominating the affairs. It was also partly due to the two World Wars which pushed central banks towards financing government deficits.
The Fed Accord of 1951: A Turning Point
Post-WWII, the Federal Reserve began to be worried over inflation. Then FOMC chair Marriner Eccles started mentioning the need to discontinue “the peg” which was not taken kindly by the government. In 1948, then President Harry Truman replaced Eccles with Thomas McCabe as Fed Chair. Though, Eccles continued to serve as a member on the FRB. The Korean War of 1950 further aggravated the inflation situation. After many deliberations, the government agreed to end the peg in 1951. The Fed Accord of 1951 became the turning point in Federal Reserve independence as the central bank could now freely change interest rates without worrying about government bonds.
The Way Forward
Coming back to today, how does one see the Trump-Powell conflict? Even though there are parallels with earlier such skirmishes, there are major differences as well. First, central bank independence especially that of Federal Reserve is taken very seriously by financial markets. The financial markets have reacted negatively to these developments providing a clear signal to the US government to not meddle with the central bank.
The Limits of Presidential Power
Second, Trump cannot fire Powell as is widely speculated. Under the Federal Reserve Act, the US President can only dismiss Fed governors when there is a genuine cause such as inefficiency or negligence of duty. FRB members are appointed for 14 years and within them FRB Chair is appointed for a period of eight years. Powell was appointed as a full-member in 2014 and Chair in 2018. Thus his term as Chair is till May-2026 and as Board member till 2028. So unless he resigns, he will be Chair till 2026 and remain an influential member in the Board till 2028.
Conclusion
To sum up, even though acrimony with Fed gets the President eyeballs which he constantly seeks, he should avoid unnecessarily treating the central bank and its chair as some kind of an enemy. He will only create more problems for his Presidency which already is facing both ire and fire from both supporters and detractors. The US economy is doing quite well which is also what the President keeps telling us. The Federal Reserve expects growth to be 1.8 percent and unemployment at 4.2 percent over long term. The immediate worry is inflation which is expected to be above 2 percent in 2025 and 2026 before trending lower to target 2 percent in 2027. In these times, the focus of the central bank should be on lower inflation which has also been the lesson of the 1970s which was learnt the hard way.
