Introduction to the Conflict
The recent visit of Donald Trump to the Federal Reserve headquarters served as a temporary distraction from other news, but it also highlighted the ongoing pressure campaign by the President on Jerome Powell, the Fed chairman. The visit, which included a tour of the renovation site, was an opportunity for Trump to push his agenda for lower interest rates. However, the tension between Trump and Powell is not just about interest rates; it’s also about the independence of the Federal Reserve and the limits of presidential power.
The Pressure Campaign
Since taking office, Trump has repeatedly criticized Powell and the Fed for not cutting interest rates quickly enough. He has used strong language to describe Powell, calling him a "numbskull" and a "moron." This kind of verbal attack is unusual for a President and has raised concerns about the independence of the Fed. Trump’s actions are similar to those of other populist leaders, such as Hungary’s Viktor Orbán and Turkey’s Recep Tayyip Erdoğan, who have also clashed with their central banks.
The Reasons Behind the Clash
The conflict between Trump and Powell is not just about personalities; it’s also about the role of the Federal Reserve in the economy. The Fed is an independent institution that is designed to make decisions based on economic data, not political considerations. However, Trump and other populist leaders often see the central bank as a tool to stimulate the economy and improve their popularity. They may pressure the central bank to cut interest rates, even if it’s not the best decision for the economy.
The Impact on the Economy
The pressure campaign by Trump has raised concerns about the impact on the economy. Selva Demiralp, a professor of economics at Koç University, has studied the effects of populist leaders on central banks. She notes that financial markets have often reacted adversely to populist leaders exerting pressure on central banks. In Turkey, for example, Erdoğan’s determination to have low interest rates resulted in capital fleeing the country, a collapse in the value of the currency, higher inflation, and an extended period of slow economic growth.
The US Economy and the Fed
The US economy is stronger than the Turkish economy, and the dollar is a more stable currency. However, Demiralp sees parallels between Trump and Erdoğan, who eventually relented and brought on more independent-minded central bankers. The key difference is that the US has stronger institutions, including the Federal Reserve, which has been independent since 1951. However, Trump’s pressure campaign has raised concerns about the autonomy of the Fed and its ability to make decisions based on economic data.
The Future of the Fed and Interest Rates
Trump’s visit to the Fed headquarters was an opportunity for him to press his case for lower interest rates. However, the Fed is likely to hold its benchmark rate at 4.25 to 4.5 percent, despite Trump’s calls for rates as low as one percent. The inflation rate is still above the Fed’s target, and Trump’s tariffs are starting to drive up prices. The Fed’s policy committee, which includes officials who were not appointed by Trump, is unlikely to buckle easily to pressure from the President.
The Potential for a New Fed Chairman
Assuming that Trump holds off from trying to dismiss Powell, he will soon get the opportunity to install a more pliant replacement. However, the Fed chair doesn’t set interest rates alone; the policy committee determines them by majority vote. Demiralp notes that the Fed would fight to protect its policy space, but Trump is likely to continue his pressure campaign.
Conclusion
The conflict between Trump and Powell is a significant issue that raises concerns about the independence of the Federal Reserve and the limits of presidential power. The pressure campaign by Trump has raised concerns about the impact on the economy, and the potential for a new Fed chairman who is more pliant to the President’s wishes. However, the Fed’s autonomy and its ability to make decisions based on economic data are crucial for the stability of the economy. As Demiralp notes, "I think Trump is going to continue his pressure campaign," but the Fed is likely to resist and protect its policy space.
